Are People In Middle-Wage Jobs Getting Bigger Raises?

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by: The Federal Reserve Bank of Atlanta

As observed in this Bloomberg article and elsewhere, the Atlanta Fed's Wage Growth Tracker (WGT) reached its highest post-recession level in April. This related piece from Yahoo Finance suggests that the uptick in the WGT represents good news for middle-wage workers. That might be so.

Technically, though, the WGT is the median change in the wages of all continuously employed workers, not the change in wages among middle-income earners. However, we can create versions of the WGT by occupation group that roughly correspond to low, middle, and high-wage jobs, which allows us to assess whether middle-wage workers really are experiencing better wage growth. Chart 1 shows median wage growth experienced by each group over time. (Note that the chart shows a 12-month moving average instead of a three-month average, as depicted in the overall WGT on our website.)

Chart 1: Wage Growth by Type of Job

Wage growth for all three categories has risen during the past few years. However, the timing of the trough and the speed of recovery vary somewhat. For example, wage growth among low-wage earners stayed low for longer and then recovered relatively more quickly. Wage growth of those in high-wage jobs fell by less but also has recovered by relatively less. In fact, while the median wage growth of low-wage jobs is back to its 2003-2007 average, wage growth for those in high-wage jobs sits at about 75 percent of its pre-recession average.

Are middle-wage earners experiencing good wage growth? In a relative sense, yes. The 12-month WGT for high-wage earners was 3.1 percent in April compared with 3.2 percent and 3.0 percent for middle- and low-wage workers, respectively. So the typical wage growth of those in middle-wage jobs is trending slightly higher than for high-wage earners, a deviation from the historical picture.

Interestingly, this pattern of wage growth doesn't quite jibe with the relative tightness of the labor market for different types of jobs. As was shown here, the overall WGT appears to broadly reflect the tightness of the labor market (possibly with some lag).

In theory, as the pool of unemployed shrinks, employers will face pressure to increase wages to attract and retain talent. Chart 2 shows the 12-month average unemployment rates for people who were previously working in one of the three wage groups.

Chart 2: Unemployment Rate by Type of Previous Job

Like the relationship between overall WGT and the unemployment rate, wage growth and the unemployment rate within these wage groups are negatively correlated (in other words, when the unemployment rate is high, wage growth is sluggish). The correlation ranges from minus 0.81 for low-wage occupations to minus 0.88 for middle-wage occupations.

However, notice that although the current gap between unemployment rates across the wage spectrum is similar to pre-recession averages, the current relative gap in median wage growth is different than in the past. In particular, the wage growth for those in higher-wage jobs has been sluggish compared to middle- and lower-wage occupations.

Nonetheless, it's clear that the labor market is getting tighter. Wage growth overall has moved higher over the past year, driven primarily by those working in low- and middle-wage jobs. Is firming wage growth starting to show up in price inflation? Perhaps.

The consumer price index inflation numbers moved higher again in April, and Atlanta Fed President Dennis Lockhart said on Tuesday that - from a monetary policy perspective - recent inflation readings and signs of better growth in economic activity during the second quarter (as indicated by the Atlanta Fed's GDPNow tracker) are encouraging signs.

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