by Calculated Risk on 12/30/2019 12:38:00 PM
Monday, December 30, 2019
Earlier I posted some questions for next year: Ten Economic Questions for 2020. I'm adding some thoughts, and maybe some predictions for each question.
5) Real Wage Growth: Wage growth was disappointing in 2019 (up 3.1% year-over-year as of November). How much will wages increase in 2020?
The most followed wage indicator is the “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka "Establishment") monthly employment report.
Click on graph for larger image.
Nominal wage growth (blue line) had been running close to 2% from 2010 through 2015 with a slight upward trend.
Then the pace of wage growth started to pickup in 2016. However wage growth in 2019 was disappointing (only up 3.1% YoY in November).
However, with low inflation, workers was some real wage growth in 2019. 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.
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).
The 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% - and at 3.7% in November 2019.
Note: Economist Ernie Tedeschi has an excellent discussion on Twitter using the Atlanta Fed Wage Tracker, and breaking it down by quantile. The bottom quantile is seeing the fastest wage growth, possibly suggesting some pickup in wages in 2020.
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 to the mid 3% range in 2020 according to the CES.
Here are the Ten Economic Questions for 2020 and a few predictions:
• Question #1 for 2020: How much will the economy grow in 2020?
• Question #2 for 2020: Will job creation in 2020 be as strong as in 2019?
• Question #3 for 2020: What will the unemployment rate be in December 2020?
• Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?
• Question #5 for 2020: How much will wages increase in 2020?
• Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?
• Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?
• Question #8 for 2020: How much will RI increase in 2020? How about housing starts and new home sales in 2020?
• Question #9 for 2020: What will happen with house prices in 2020?
• Question #10 for 2020: Will housing inventory increase or decrease in 2020?