How Fast Are U.S. Wages Growing? Faster Than Many Think

A new study concludes that real wages grew more than the reported 0.1%.

Author's Note: The requisite 30 days have passed since my op/ed on real wage increases appeared in the Wall Street Journal. So here’s the whole piece, which appeared in the September 21, 2018, print edition.

Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.

A study released this month by the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data.

  • Fringe benefits. Because benefits have become an increasing proportion of employee compensation over time, growth in real wages has been understated. The CEA estimates that including benefits would add 0.2 percentage point to the 2017-18 figure.
  • Inflation. An ideal measure would cover a very large percent of what workers buy, would account for the tendency to buy less of goods and services whose relative prices have risen and more of goods and services those whose prices have fallen, and would somehow correct for the improvements in quality of almost everything sold in the private market. As Stanford’s Michael Boskin has pointed out, the usual measure of inflation, the consumer-price index, doesn’t do this very well. An alternate measure of inflation, the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages.
  • Change in the labor force. As baby boomers retire, they are replaced by younger workers. So even though average wages may not rise much, the wages of the majority of people working could rise a lot. The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18.

Because of rounding error, these three factors add up to 0.9 point. The net result: When adjusted for benefits, inflation, and seniority, real wages actually grew 1% between 2017 and 2018. This is not a partisan point. The same methodology would show that real wages grew more than was reported during much of President Obama’s time in office.

But there is, in this context, one relevant difference between the Trump and Obama administrations: the 2017 tax cut. Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study. This overstates the benefits, given the Congressional Budget Office’s estimate that the tax cut will make the 2028 federal debt 7% higher than otherwise. Yet even aside from the tax cut, real wages are growing at a healthy pace. That’s good news for American workers.

This article was reprinted with permission from EconLib.

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