Wage growth in America: Why wage growth is so complicated, and how to understand it better
For something that is so important to the everyday lives of average Americans, wage growth statistics tend to be thrown around without much analysis. Strangely, depending on who you’re talking to, wage growth has either been impressive, or stagnant for decades on end. While Sen. Bernie Sanders has claimed that “the average American today has not seen a nickel more in real wages than he or she got 45 years ago”, President Trump claimed “wages are rising at the fastest rate in a decade” (Robertson 2019). How is it that such a seemingly simple statistic can be interpreted in such opposing ways?
Wage growth statistics, like much else in economics, are less definite the more one looks into them. Statistics can be fit to any story if they are manipulated enough. The Brookings Institution demonstrated in a 2019 article that depending on the measures one used, wage growth in the past several decades has been anything from 23% to -13%, depending on gender, inflation measure, starting year, and income percentile. In fact, the Brookings article only scratches the surface of the issue. To better understand how to measure wage growth, though, one must first understand several important economic concepts and debates.
A Smorgasbord of Variables
Inflation, the gradual decreasing of the value of money, is an extremely important element of any wage growth statistic. Since the value of a dollar has decreased significantly over time, this means that measuring wage growth using dollar values from each year (nominal values) tells little. But there are several competing measures of inflation, and using different measures will paint different pictures. The CPI, or Consumer Price Index, shows the highest amount of inflation, and is used by the Bureau of Labor Services. Personal Consumption Expenditures, or PCE, shows a lower amount of inflation, and therefore a higher amount of wage growth. There are other measures, too, like the IPD, or Implicit Price Deflator (Sherk 2016). These measures differ because they track different “baskets” of goods that the average consumer purchases (Haubrich and Millington 2014).
Another vital element of wage growth is what, exactly, wages are defined as. When one thinks of wages, what probably comes to mind is direct monetary compensation to workers. However, jobs also provide benefits, which can range from simple provisions for Social Security to comprehensive healthcare, childcare, and pensions. Benefits have grown as a percentage of total compensation over time (Appelbaum 2018), so if a wage growth measure doesn’t include them, it may underestimate increases in well-being for employees.
Finally, it’s important to remember that wage growth trends can be asymmetric across different parts of the income distribution, as well as different demographics. Service workers at Walmart or Amazon, for example, populate the same economy that investment bankers do, but they are subject to radically different economic forces. Unlikely things that would seem to be invariant across incomes are not so in reality; for example, a recent study found that poorer families are subject to a higher inflation rate than their wealthier counterparts (Lowrey 2019).
Wage growth is also highly dependent on age, with younger workers seeing higher percentage increases than older workers, which means that the age composition of the labor force- the proportions of those currently working by age range- may affect wage growth statistics. An increase in older workers retiring, for example, would increase wage growth spuriously, because it would indicate little about the welfare of individual workers in the job market.
Simple Concept, Complex Truths
To get to the bottom of radically disparate claims about wage growth, I decided to undertake my own analysis of Bureau of Labor Statistics data. Unfortunately, my analysis is unable to account for many of the confounding variables listed above, but it does give a look at wage growth at different places in the income distribution, as well as whether compensation (wages+benefits) growth looks significantly different from simple wage growth.
Another potential shortcoming of the analysis is that it only reviews trends from the last decade. BLS’s data on real wage growth disaggregated by percentile only begins in 2009, but the dataset still proves to answer important questions about recent economic events.
Firstly, wage growth follows similar trends across percentiles. Workers at the 10th, 50th, and 90th percentiles in the wage distribution have seen similar percentage increases and decreases in wage growth by year, adjusted for inflation. It’s important to remember that when analyzing comparative wage growth between different groups in the same year, the method of inflation measurement doesn’t matter, because all groups are subject to the same measure. Real compensation growth features a largely similar pattern.
While growth rates by percentile for both wages and compensation are similar, growth rates across years are not. Broadly, wages decreased for the first few years of the 2010s, rapidly increased in the middle of the decade, and settled into low growth for the last years. This data ends in March of 2020, so it takes into account very little of COVID-19’s effect on the labor market. However, the data provided is indicative of other significant economic events that have taken place in the United States in the last decade, like the Great Recession and its stimulus package, the Trump trade war with China, and the 2017 Tax Cuts and Jobs Act.
Though this data is imperfect, it suggests that both common stories about wage growth aren’t correct. Contrary to the wage stagnation theory, wage growth has largely been positive for all three percentiles since 2014. Unlike statements from Trump, however, data from the years after his landmark tax reform bill show little evidence of an improved environment for workers in regards to increased wages.
Wage growth statistics like these sometimes provide no easy answers. Confounding variables abound, and the data can easily be manipulated. Hopefully, future research will shine further light on trends in wage growth, and allow a better understanding of the inner workings of the economy. However, a better comprehension of these statistics among both those in the labor market and those in politics is possible, and necessary, today.
Works cited:
Appelbaum, Binyamin. “One Reason for Slow Wage Growth? More Benefits.” The New York Times, The New York Times, 25 Sept. 2018, www.nytimes.com/2018/09/25/us/politics/wage-growth-benefits.html.
Haubrich, Joseph G, and Sara Millington. PCE and CPI Inflation: What’s the Difference? Federal Reserve Bank of Cleveland, 17 Apr. 2014, www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2014-economic-trends/et-20140417-pce-and-cpi-inflation-whats-the-difference.aspx.
Lowrey, Annie. “The Inflation Gap.” The Atlantic, Atlantic Media Company, 5 Nov. 2019, www.theatlantic.com/ideas/archive/2019/11/income-inequality-getting-worse/601414/.
Reeves, Richard V., et al. “Are Wages Rising, Falling, or Stagnating?” Brookings, Brookings, 23 Sept. 2019, www.brookings.edu/blog/up-front/2019/09/10/are-wages-rising-falling-or-stagnating/.
Robertson, Lori. “Are Wages Rising or Flat?” FactCheck.org, 28 June 2019, www.factcheck.org/2019/06/are-wages-rising-or-flat/.
Sherk, James. The Heritage Foundation, 2016, Workers’ Compensation: Growing Along with Productivity, www.heritage.org/jobs-and-labor/report/workers-compensation-growing-along-productivity.
