Bigger and Better Story on Wages

By at 16 October, 2018, 10:28 am

Small Business Insider: The Economy

by Raymond J. Keating-

On October 11, the Bureau of Labor Statistics reported that real average hourly earnings on private nonfarm payrolls grew solidly by 0.3 percent in September versus August. In addition, real average hourly earnings have increased in six of the last seven months.

That’s welcome growth.

Of course, there’s been a great deal of debate recently about the growth, or lack thereof, in wages for American workers. But the focus of this debate needs some fine tuning or clarification, to say the least. For example, the BLS report on hourly earnings is based on hours paid, not hours worked. Indeed, there are an assortment of issues, or shortcomings, that people need to be aware of when it comes to measuring worker compensation.

The Council of Economic Advisers recently published a report – titled “How Much Are Workers Getting Paid? A Primer on Wage Measurement” (September 2018) – that addressed some key challenges, and made appropriate adjustments to arrive at more accurate assessments of what American workers are earning.

The CEA identified four key problems in the various measures of worker earnings, and summed these up as follows:

●  “First, many of the official wage statistics fail to incorporate additional employment benefits such as bonus pay, health insurance and contributions to retirement savings. These additional benefits have made up an increasing share of compensation in recent years, so the growth in total compensation has been greater than that seen for cash wages alone. Ignoring bonus pay and other benefits is particularly misleading during the past year when over 6 million workers have benefitted from the tax cuts in the form of pay raises, better benefits, and bigger bonuses.” In fact, nonwage benefits have grown to over 30 percent employer worker compensation costs. The CEA also noted that “nonwage characteristics within a job are important for explaining job mobility and the value of jobs among workers.”

●  “Second, because those entering the workforce for the first time or after a period of not working generally have less work experience than those who have been continuously employed, these new workers also often have lower wages. As a result, when tracking the average wage of those working at a given point in time, these new workers will create the appearance of lower wage growth than workers are actually experiencing.”

●  “Third, when measuring real wages, it is necessary to properly measure inflation in the economy. When using the Personal Consumption Expenditure Price Index (PCEPI)—which is preferred by many economists, including those at the Federal Reserve—we observe faster real wage growth than when using the commonly reported Consumer Price Index for Urban Consumers.” The PCEPI is generally considered the more accurate measure for a variety of reasons, including that it “frequently updates the basket of goods to reflect changes in consumer behavior as they happen” versus the CPI-U’s “fixed basket weighting approach”; and “whereas the CPI-U captures the out-of-pocket expenditures of urban households, the PCEPI measures all goods and services that are purchased by both households and nonprofit institutions serving households.”

●  “Fourth and finally, as a result of personal income tax cuts resulting from the Tax Cuts and Jobs Act of 2017, real after- tax income has been rising faster than pre-tax income. These lower personal income taxes are also not captured in official wage statistics.”

So, what happens to the outlook on worker earnings when the CEA attempts to make appropriate adjustments to address such shortcomings? The CEA explained: “Incorporating the faster growth of benefits, demographic composition effects, and personal taxes into prior years, hourly earnings growth has been greater during the recovery than without taking these factors into account… Over the past 5 years, from the first quarter of 2013 to the second quarter of 2018, average real hourly after-tax compensation has risen by 7.4 percent. Furthermore, average real hourly after-tax compensation is now 1.9 percent above what it was at the end of 2016.”

In addition, it was reported: “Over the past year (2017:Q2–2018:Q2), real average hourly after-tax compensation has risen by 1.4 percent, well above the near-zero real wage change suggested by headline measures. An alternative to CEA’s approach is to take the Atlanta Federal Reserve’s Wage Growth Tracker nominal cash wage growth, adjust for taxes and fringe benefits, and deflate with the PCEPI, in which case real after-tax compensation growth is 1.9 percent over the same period.”

But there’s more potential positives looking ahead thanks to key changes in public policy. The CEA noted:

“Moreover, still-higher wage growth is to be expected in the future because three types of policy changes are affecting wage growth. Deregulation and business tax reform increase productivity, and therefore real wages, in a cumulative way over time as businesses accumulate more capital. The business tax reform in particular is barely a half year old.

“The third type of recent policy changes are the reductions in explicit and implicit taxes on work. The recent recession featured major new Federal disincentives to work, which reduced work and had the side effect of increasing hourly wages and productivity somewhat in the short run as employers had to compete with new safety net programs… The reverse happened more recently because a number of the disincentives were temporary and the Trump Administration has made efforts to eliminate others, such as the renewed enforcement of long-standing work requirements for Federal assistance programs. That is, even without business tax reform, wage growth is expected to be a delayed part of the expansion as business investment adjusts to the higher levels of work and consumption that can occur now that work disincentives have been eliminated or reduced.”

As many economists will tell you: To get at a good economic story, get the data right and point the policy in a pro-growth direction.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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