Monday, December 29, 2014

Question #6 for 2015: Will real wages increase in 2015?

by Bill McBride on 12/29/2014 07:08:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

6) Real Wage Growth: Last month I listed a few economic "words of the year" for the last decade. I finished with: "2015: Wages (Just being hopeful - maybe 2015 will be the year that real wages start to increase)". Will real wages increase in 2015?

Jared Bernstein wrote an excellent article today on the labor market at the NY Times The Upshot: Signs of a Tightening Labor Market, but Still Room for Improvement. He mentioned wages:

For all the actual tightening in the 2014 job market, what is perhaps the most important indicator from the perspective of working families — wage growth — has hardly budged. Though commentators made a big deal out of the bump in pay from the last jobs report, the yearly trend in nominal hourly wage growth remains at about 2 percent, where it has been since 2010.
Bernstein is referring to “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka "Establishment") monthly employment report, .

Wages CES, Nominal and Real Click on graph for larger image.

The blue line shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees.  As Bernstein noted, nominal wage growth has been running close to 2% since 2010.

The red line is real wage growth (adjusted using headline CPI).  Real wages increased during the crisis because CPI declined sharply.   CPI has been running under 2%, so there has been some real wage growth - and some of the recent increase in real wages is due to falling oil prices (CPI declined in November).

There are two quarterly sources for earnings data: 1) “Hourly Compensation,” from the BLS’s Productivity and Costs; and 2) the Employment Cost Index which includes wage/salary and benefit compensation. All three data series are different, and most of the focus recently has been the CES series (used in the graph above).

Wages ECI, Nominal and Real
The second graph shows the year-over-year change using the quarterly wage data from the Employment Cost Index (data starts in 2001). Once again this shows nominal wages have increasing about 2% per year, and real wages have been mostly unchanged. In the future I'll post a graph including benefits (benefits generally have risen faster than wages).

For this post the key point is that nominal wages have been only increasing about 2% per year. As the labor market tightens, we should start seeing some wage pressure as companies have to compete more for employees. Whether real wages start to pickup in 2015 - or not until 2016 or later - is a key question. I expect to see some increase in both real and nominal wage increases this year. I doubt we will see a significant pickup, but maybe another 0.5 percentage points for both, year-over-year.

Here are the ten questions for 2015 and a few predictions:
Question #2 for 2015: How many payroll jobs will be added in 2015?
Question #3 for 2015: What will the unemployment rate be in December 2015?
Question #4 for 2015: Will too much inflation be a concern in 2015?
Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
Question #6 for 2015: Will real wages increase in 2015?
Question #7 for 2015: What about oil prices in 2015?
Question #8 for 2015: How much will Residential Investment increase?
Question #9 for 2015: What will happen with house prices in 2015?
Question #10 for 2015: How much will housing inventory increase in 2015?