Monday, December 31, 2018

Question #7 for 2019: How much will wages increase in 2019?

by Bill McBride on 12/31/2018 03:58:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2019. I'm adding some thoughts, and maybe some predictions for each question.

7) Real Wage Growth: Wage growth picked up in 2018 (up 3.1% year-over-year as of November).  How much will wages increase in 2019?

The most followed wage indicator is the  “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.  Nominal wage growth had been running close to 2% since 2010, and picked up a little in 2015, and more in 2016.

The red line is real wage growth (adjusted using headline CPI).  Real wages increased during the crisis because CPI declined sharply.   CPI was very low in 2015 - due to the decline in oil prices - so real wage growth picked up in 2015.

Real wage growth trended down in 2017, and picked up a little in 2018.

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).

Atlanta Fed Wage TrackerThe second graph is from the Atlanta Fed Wage Tracker.   This measure is the year-over-year change in nominal wages for individuals.

By following wage changes for individuals, this removes the demographic composition effects (older workers who are retiring tend to be higher paid, and younger workers just entering the workforce tend to be lower paid).

The Atlanta Fed Wage tracker showed nominal wage growth close to 4% in late 2016, but dipped in 2017.   At the end of 2018, wage growth was back up to close to 4%.

As the labor market continues to tighten, we should see more wage pressure as companies have to compete for employees. I expect to see some further increases in both the Average hourly earning from the CES, and in the Atlanta Fed Wage Tracker.  Perhaps nominal wages will increase close to 3.5% in 2019 according to the CES.

Here are the Ten Economic Questions for 2019 and a few predictions:

Question #1 for 2019: Will Mr. Trump negatively impact the economy in 2019?
Question #2 for 2019: How much will the economy grow in 2019?
Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?
Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?
Question #4 for 2019: What will the unemployment rate be in December 2019?
Question #5 for 2019: Will the core inflation rate rise in 2019? Will too much inflation be a concern in 2019?
Question #6 for 2019: Will the Fed raise rates in 2019, and if so, by how much?
Question #7 for 2019: How much will wages increase in 2019?
Question #8 for 2019: How much will Residential Investment increase?
Question #9 for 2019: What will happen with house prices in 2019?
Question #10 for 2019: Will housing inventory increase or decrease in 2019?