On Friday, the Bureau of Labor Statistics (BLS) will release its monthly report on the state of the labor market. In addition to employment growth in high-level wages and changes in labor force participation, probably the most anticipated measure is the pace of nominal wage growth.
Despite the recent contraction in gross domestic product (GDP), the labor market has expanded at a steady pace and wage growth continues to lag behind inflation. Despite this, many continue to fear that abnormally high nominal wage growth (compared to the pre-pandemic) will prevent inflation from returning to more normal levels in the next year. In this Labor Day preview post, we take a closer look at wage growth using different measures to gauge how concerned we should be that wage growth will not normalize in the next year without aggressive policy measures that cause collateral damage (such as a higher unemployment) in the labor market. We believe most of these measures show a slowdown in wage growth over the past few quarters.
In Figure A, we report quarterly changes in earnings (expressed as an annualized rate) using five measures: average hourly earnings for all workers from current employment statistics (CES); average hourly wages for production and non-CES workers; private wages and salaries from the labor cost index (ECI); private wages and salaries, excluding paid incentives, from the ECI; and private wages and salaries from national income and product accounts divided by a measure of the aggregate hours we build. We average over quarters for CES measures, which are generally reported monthly. The data note at the end of this post gives more details on these series.
All but the ECI series show pronounced spikes in wage growth in 2020. These are the result of the well-known “composition effect” brought about by job losses which has been extremely skewed towards lower wage workers. The ECI series are “fixed weight” series which are not affected by compositional variations. Over the past few quarters, the effect of compositional changes in rising and then slowing wage growth seems to be behind us. More importantly, four of the five series show wage growth that has not only stabilized but is decelerating recently, even though the unemployment rate remains quite low. This is obviously not indicative evidence that wage growth will fully normalize to pre-pandemic trends, but it is comforting to see a deceleration even as non-wage price factors keep inflation very high and unemployment remains very low.
Quarterly wage growth shows no signs of accelerating in the first half of 2022: Annualized quarterly wage changes, alternative measures, 2018-2022
| quarterly changes | AHE, totally private | AHE, prod / not super | ECI (private wages and salaries) | ECI (private, excluding paid incentive) | NIPA Total wages and salaries / hours of the private sector |
|---|---|---|---|---|---|
| 2018Q2 | 2.8% | 2.8% | 2.8% | 2.8% | 1.8% |
| 3rd quarter 2018 | 3.7% | 3.3% | 3.7% | 2.7% | 4.7% |
| 4th quarter 2018 | 3.6% | 3.9% | 2.7% | 2.1% | 1.3% |
| 1st quarter 2019 | 3.7% | 4.0% | 2.7% | 3.6% | 9.6% |
| 2nd quarter 2019 | 2.3% | 2.9% | 3.0% | 3.3% | 2.1% |
| 3rd quarter 2019 | 3.6% | 3.9% | 3.6% | 2.7% | -0.2% |
| 4th quarter 2019 | 3.1% | 3.2% | 2.6% | 2.3% | 5.3% |
| 2020Q1 | 4.0% | 4.2% | 4.1% | 4.4% | 5.9% |
| 2020Q2 | 16.3% | 16.2% | 1.4% | 1.4% | 24.8% |
| 2020Q3 | -3.0% | -3.1% | 2.3% | 2.6% | -3.8% |
| 2020Q4 | 3.2% | 3.4% | 3.4% | 2.6% | 10.6% |
| 2021Q1 | 4.2% | 4.6% | 4.8% | 4.3% | 0.0% |
| 2021Q2 | 4.7% | 6.4% | 3.6% | 3.9% | 9.0% |
| 3rd quarter 2021 | 5.7% | 7.2% | 6.5% | 5.0% | 8.2% |
| 4th quarter 2021 | 6.1% | 7.3% | 4.7% | 5.3% | 10.0% |
| 1st quarter 2022 | 5.2% | 6.0% | 5.2% | 6.6% | 7.7% |
| 2022Q2 | 4.3% | 5.4% | 6.5% | 5.4% | 5.9% |
The following data can be saved or copied directly into Excel.
Note: NIPA wages and salaries are adjusted to wages and hourly wages by dividing by the CES aggregate hours (including notional hours for agricultural and self-employed workers from the CPS).
sources: EPI analysis of the Bureau of Labor Statistics (BLS) current employment series and the Bureau of Economic Analysis (BEA) Current Population Survey and National Product and Income Accounts.
The data in this chart is more recent than most conventional wage trend reports, which often report year-over-year measures of wage growth. However, comparing wage growth between, say, June 2021 and June 2022 makes it easy to miss key turning points. If wage growth was extremely rapid between June 2021 and December 2021 but then moderated significantly, year-over-year measures will generally only show very rapid wage growth. As the Federal Reserve is trying to look forward to the curve on the determinants of inflation (such as wage growth), the most recent measures that pick up on current trends are invaluable.
It is this desire to see the latest wage trends that leads us to think that a common measure of wage growth – the Federal Reserve Bank of Atlanta’s Wage Growth Tracker (AWGT) – looks too far back to shed much light on current policy debates. The AWGT looks at wage changes for specific individuals over a year, then uses a 3-month moving average of these year-over-year changes for its main reading. But this means that at the AWGT data point for June 2022, just under 60% of the monthly wage growth data contributing to the final number occurred in 2021.
In the coming weeks, we will continue to look for other wage growth measures that can be monitored in a timely manner. For now, most of the measures we are monitoring seem to lend some optimism to the idea that wage growth can normalize without a sharp rise in unemployment.
data note
The two CES series are presented as reported by the BLS on a quarterly average basis. The first ECI measure concerns changes in the main set of wages and salaries of the private sector. The second is a measure devised by the BLS that controls wage volatility by excluding incentivized paid workers. In the BLS description, this series without wage incentives is similar to “core” measures of price inflation that eliminate highly volatile (food and energy) prices, potentially providing a better measure of underlying wage trends.
The last series provides a measure of average wages at the economy level by using the wages and salaries of the private sector from the BEA NIPA data and dividing by a constructed measure of the hours at the economy level. We construct this hour measure by adjusting the private sector aggregate weekly hour measure provided monthly by the BLS to account for self-employed and agricultural workers. We make this adjustment by multiplying the measure of aggregate weekly hours by a ratio of the sum of: private sector employment plus self-employment plus agricultural employment divided by private sector employment. This adjusts the measurement of hours to account for the workforce not directly included, but assumes that the growth in hours in the non-included sectors reflects changes in the private sector. For the aggregate weekly hours of private non-agricultural workers and private non-agricultural employment, we use data from current employment statistics. For self-employed and agricultural workers, we use the Current Population Survey (CPS), as these groups are not monitored in the CES.
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