Are Wages Really Growing?

There was a big to-do over last Friday’s employment report for December. The positive reception to the report was not so much for the number of jobs added in the month (156K compared to the estimate of 175k) or the unemployment rate (4.7%, in line with consensus), but rather it was the wage data that drew economists’ attention. The report said that Average Hourly Earnings grew 2.9% in December to $26.00. This was the highest rate of year-over-year growth since June, 2009, and it was slightly ahead of the consensus estimate for +2.8% growth. We have written at great length about how middle-class income growth has been the missing element to our current economic expansion. We’ve talked about how the overwhelming percentage of income and wealth gains have accrued to the wealthiest among us. And we’ve said that the economic recovery will not take root in earnest until there is a more widespread distribution of the income and wealth gains. So Friday’s data should go a long way to alleviating our concerns, right?

yoygrowth*Source: US Bureau of Labor Statistics

Before we start breaking out the champagne bottles, there is some additional information that needs to be considered. The graph above tracks the growth in nominal wages rather than the growth in real wages. The nominal rate of growth is simply the YOY change in compensation per labor hour. In December, the average wage earner took home $26.00 in wages and benefits, up 2.9% from the $25.26 he took home in December, 2015. The real rate of growth, on the other hand, adjusts for inflation. The real rate of growth is calculated by subtracting the inflation rate, which is the Consumer Price Index (CPI), from the nominal rate of growth. Because the CPI has been accelerating for the past couple of years and is expected to come in at 2.1% for December, the 2.9% nominal growth rate for December will only translate to a 0.8% real rate of growth. As the orange line in the graph below shows, growth in real Average Hourly Earnings has actually been decelerating. Why is this important? Because middle class Americans aren’t any better off if their expenses grow at a faster rate than their income.

The blue line in the graph below shows another somewhat troublesome metric – Average Weekly Hours. You can see that this line has also been falling in recent months, and the latest reading of 34.3 hours is tied for the lowest reading since January, 2011. Would this trend be expected if we were in the midst of accelerating economic growth? Probably not. Workers, encouraged by better opportunities to earn more income, would be working longer hours. Employers, for their part, would try to get the most out of existing employees before hiring additional employees to meet increases in demand. The combination of an expanding work force, longer work weeks, and higher hourly earnings would lead to rapid gains in aggregate earnings, and these gains would spark additional spending and result in a virtuous cycle. That’s not what’s happening.

averageweeklyhours*Source: US Bureau of Labor Statistics

At the very least, these data may suggest that there remains more slack in the labor market than many economists might appreciate. That slack will likely allow the Fed to maintain accommodative monetary policy for longer than would otherwise be the case. The more troubling interpretation, though, is that the middle-class continues to get squeezed by the combination of lackluster income growth and accelerating expense growth. If this is indeed the case, one can only hope that the promised cavalry of tax cuts, infrastructure spending and reduced regulation arrives before the sting of higher interest rates sets in.