[Note: This is a post I was working on last week. I hypothesized that the employment cost index would validate the analysis. Well, I didn’t get around to posting it, and the ECI came out this morning. So, how did I do? ]
Last week the Bureau of Labor Statistics reported that real weekly median wages declined by over 2% in the 4th quarter of last year! This is quite the anomaly in the face of generally good data that has been reported in the last few months.
But I thought I would dig deeper to see why the anomaly had occurred. So I took a detailed look at each of the three qualifiers: “real,” “median,” and “weekly.” Where did the downturn come from?
Well, part of it certainly had to do with inflation. Recall that one of my favorite measures, “real aggregate wages” actually peaked in July and has declined -0.8% since then, mainly due to an uptick in inflation. It is easy to break that out, since the BLS also releases nominal weekly wage data. So here are the two together for comparison:
The uptick in inflation is responsible for about 1/3 of the decline in real weekly median wages.
Next, let’s take a look at average hours worked per week:
These actually increased between the 2nd and 4th quarters. So it’s not that fewer hours are being worked per week.
Is something going on with the “median” vs. “average” measures? The next graph compares the weekly measure with real average hourly wages:
Median wages declined more than average wages. So that tells us that the main thing that probably happened had to do with the makeup of the labor force.
To check that, I compared job growth among professional and business workers (a high-paying category) vs. retail workers (a low-paying category). How much did each grow during recent quarters? Here’s what I found:
Eureka! Professional and business hiring has remained fairly steady, even having a small bump in the second quarter. But the retail apocalypse manifested itself by outright declines in the 3rd and especially second quarters, vs. flatness in the 4th.
It appears the actual outliers were those two quarters rather than the 4th quarter. The downturn in low paying retail jobs in the middle quarters of 2017 made the median 50th percentile worker someone who worked in a somewhat higher paying job.
The best way to test this hypothesis is to see what happened quarter over quarter to pay for identical jobs. That is exactly what gets measured by the Employment Cost Index. If what mainly happened in the 4th quarter is that the mix of jobs in the economy changed, then the only decline we should see in the E.C.I. is that due to inflation. That report comes out next week, so we will have the answer soon enough.
AAAAND, this morning the Employment Cost index showed that wages *ROSE* 0.5% in Q4, and total compensation rose 0.6%. The nominalYoY% increase for each was 2.5%:
In real, inflation adjusted terms both wages median compensation declined -0.3%:
So the big dropoff in weekly median wages does indeed appear to be a story of a change in the mix of jobs, rather than a drop in actual pay of a job. Still, nominal wage growth in the latter part of 2017 was eclipsed by the uptick in inflation. This, by the way, adds to the evidence that the increase in consumer spending in the last few months has been driven by the wealth effect (increasing house and stock prices for the affluent and wealthy) and dipping into savings for everybody else.