U.S. Wages Are Historically Great, Or They’re Awful. It Depends on Your Preferred Inflation Measure – Real Time Economics

Wages have been rising, particularly for those in the restaurant industry, but workers say their pay is still too low.
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Wages for most workers have been rising only slowly since the recession ended, one factor limiting acceleration in consumer spending and faster economic growth.

While there have been some signs of a pickup–McDonald’s Corp. was the latest company to announce raises for low wage workers–overall figures suggest paltry wage gains for most Americans.

So how bad- or well-off are workers? Last week, we posted a series of charts showing inflation-adjusted wages for most workers topped out in 1972. The data, an official Labor Department measure released each month, appeared to underscore soft wage gains during this recovery.

But some economists objected, saying the Labor Department is overstating true inflation when it uses the Consumer Price Index to make its calculation on real wages.

“When you use a different inflation factor, you get very different results,” Aaron McNay, an economist for the state of Montana, commented here on Real Time Economics. “For example, using the Personal Consumption Expenditure index (PCE), you see that hourly wages for non-supervisory workers have never been higher than they are now.”

Rather than peaking more than four decades ago, PCE shows wages bottoming out in 1990 and rising more or less steadily since.

The PCE index is persistently lower partly because it tries to account for the way price changes might cause consumers to substitute one item for another. It also includes a broader range of expenditures than CPI and is weighted according to data provided in business surveys, rather than the less reliable consumer surveys.

The federal government uses CPI to calculate cost-of-living wage adjustments for Social Security beneficiaries, eligibility for food stamp recipients and payments due to military retirees. The gauge also affects the cost of subsidized school lunches, some collective bargaining agreements and tax brackets.

The Federal Reserve before 2000 focused on CPI but then switched to the price index for personal consumption expenditures as the more reliable gauge.

And indeed, if you recalculate wage figures using PCE then it looks like average wages for most workers hit a new high this year.

Mr. McNay offers an important caveat. “What I think we’re seeing is this divergence, with a lot of growth in high wage jobs, and lot of growth in low wage jobs, and not a lot of growth in median wage jobs,” he said in an interview.

Labor Department data has consistently shown some of the fastest wage and job growth in leisure and hospitality, a segment that includes restaurant workers and has the lowest hourly wages among major employment categories. Professional and business services–a broad category that ranges from lawyers and architects to temporary workers and security guards–also has posted steady wage and employment gains.

Construction, manufacturing and other blue-collar jobs that have traditionally paid a solid middle-class wage are growing, though they have been slower to emerge from the recession. Neither sector has recovered all the jobs lost during the downturn.


Related reading:

By One Measure, Wages for Most U.S. Workers Peaked in 1972

CPI vs. PCE: Untangling the Alphabet Soup of Inflation Gauges

Waiting for Wage Growth? Everyone is Watching the Employment Cost Index

Wages Q&A: What do McDonald’s, Wal-Mart and Target Pay Raises Mean for the Economy?

Why Are Wages Growing Slowly Despite Wal-Mart Raises?


This first chart in this post has been updated to reflect the official Labor Department data for average weekly earnings using 1982-1984 dollars.



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23 April 2015 | 1:47 pm – Source: blogs.wsj.com


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