(What’s Left of) Our Economy: Is the Middle Class Killing It Under Trump?

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average hourly earnings, Barack Obama, ECI, election 2020, Employment Cost Index, hourly earnings, Labor Department, middle class, salaries, Trump, wages, working class, {What's Left of) Our Economy

Is the economy under President Trump producing outsized wage gains for working- and middle-class Americans, as the chief executive claims? Or have his policies betrayed the workers who gave him so many votes in the 2016 race for the White House, as his critics charge?  (See this piece for typical views from both vantage points.) 

The latest data say loud and clear that there’s some evidence that every day Americans are faring better in the Trump years. But it’s far from a slam dunk.

The first set of figures comes from this morning’s Employment Cost Index (ECI), a quarterly measure of worker compensation trends published by the Labor Department and the second is the Department’s newest monthly wage numbers.

One complication that emerges right away is that the middle class and the working class are two different groups each of whose composition is anything but homogeneous and each of whose definitions can vary widely. For example, manufacturing includes employees at opposite ends of the skills and therefore wages levels. And managers in numerous service industries earn pretty modest  salaries. (See, e.g., here.) Moreover, don’t forget gaping gaps among different regions of the country. In many major metropolitan areas, families earning six-figure incomes arguably are hard-pressed financially.

In this post, I try to distinguish between “the rich” and the rest by comparing trends for managerial and executive-type workers on the one hand (including professionals and keeping the above qualifications in mind), and non-supervisory workers on the other. As usual with compensation reports, I exclude government workers, because their wages, salaries, and benefits stems from politicians’ decisions, as opposed to the private sector, where compensation has much more to do with the economy’s fundamentals. And in the first table below, presenting calculations from the ECI data, I zero in on wage and salary costs. The reason? The ECI doesn’t directly measure what workers’ receive – instead, it gauges various costs businesses incur to keep them on their payrolls. And unlike benefits costs, wage and salary costs are much likelier actually to wind up in workers’ pockets.

What’s presented here is a number that shows the degree to which increases in wages and salaries for various classes of workers have been rising at a faster or slower pace (or actually fell) between the last nine quarters of President Obama’s administration and the first nine quarters of President Trump’s administration. (I chose these periods because they’re as close as possible to each other in the nation’s current economic cycle.) Call this figure the “wage and salary acceleration rate.” So for example, if a group of workers’ wages and salaries grew by 10 percent during the Obama period used and by 15 percent during the Trump period, the acceleration rate would be 50 percent.

And just FYI, I identify the last quarter of 2016 as Mr. Obama’s final full quarter, and the first quarter of 2017 as Mr. Trump’s first full quarter (since he took office on January 20).

Obama-Trump acceleration rate

All workers: +31.09 percent

Management/professional/related: +15.05 percent

Management/business/financial: -15.78 percent

Professional & related: +32.06 percent

Office/admin support: +15.51 percent

Construction/extraction/ +9.05 percent

farming/fishing/forestry:

  installation/maintenance/repair: +25.57 percent

Production/transportation/ +25.55 percent

  material moving:

Production: +18.26 percent

Transportation & material moving: +33.33 percent

To me, these result are a wash, in large part because the spreads between the results for the second, third, and fourth categories (the upper income categories) and those for the remaining, lower income categories are both pretty wide. Interestingly, only one group within each of these broad categories beat the workforce average of 31.09 percent – professional and related workers, and transportation and material moving workers.

The second table, presented below, compares the hourly earnings (including salaries calculated on an hourly basis) Obama-Trump accelerators for the entire private sector workforce, and for the non-supervisory portion of that workforce. Because these data come out monthly, the two time periods are the final 26 months of the Obama administration (ending in December, 2016) and the first 26 months of the Trump administration (starting in January, 2017).

These results look more clear-cut, with hourly pay for the non-supervisory workers increasing faster during the Trump presidency so far than during the final slightly more than two years of the Obama presidency.

Obama-Trump acceleration rate

All workers: +20.54 percent

Non-supervisory workers: +27.16 percent

As election 2020 so far makes clear, inequality and middle- and working-class-related trends are shaping up as major campaign issues. So far, the bottom line is that neither backers or opponents of President Trump deserve to make major political hay of them.

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(What’s Left of) Our Economy: Why Wage Inflation Claims are Still Grossly Inflated

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benefits, compensation, ECI, Employment Cost Index, inflation, salaries, wages, workers, {What's Left of) Our Economy

If you were examining whether American workers’ pay was finally beginning to rise at a rate consistent with a lengthy economic recovery and an apparently tight labor market, wouldn’t you focus on pay adjusted for inflation – which gauges whether these workers are keeping up with living costs? And wouldn’t you focus more on trends in the private sector (where wages, salaries, and benefits are set mainly by market forces, and therefore say something meaningful about the economy’s fundamentals) than in the public sector (where they’re set by government fiat)?

The alarm and enthusiasm (depending on your perspective) with which last week’s Labor Department figures on employment costs were greeted makes clear that both these best practices of economic analysis were widely ignored.

As the Department reported, the Employment Cost Index (ECI) – the compensation measure that includes all forms of pay and benefits – rose 2.71 percent on year in the first quarter of this year for “civilian workers.” That category includes the public sector, and was indeed the strongest such increase since 2008.

The numbers were even better in private industry: a 2.81 percent yearly gain. That’s also the best since 2008 (the third quarter’s 2.84 percent).

Adjust for inflation, though – that is, see the extent to which workers are staying ahead of living costs, not to mention the extent to which they are leading overall price rises – and the story looks very different.

According to the price-adjusted ECI issued by the Labor Department, during the first quarter of this year, compensation for civilian workers increased by 0.38 percent year-on-year. That’s actually lower than the annual increase for the previous quarter (0.48 percent). In fact, on a sequential (quarter-to-quarter) basis, the real ECI fell (by 0.29 percent).

That annual gain was indeed better than that for the first quarter of 2017 – when there was no increase in the inflation-adjusted ECI at all. But it wasn’t as good at the 0.87 percent improvement from the first quarter of 2015 to the first quarter of 2016. And it wasn’t even close to the 2.59 percent rise registered between the previous first quarters. So let’s recognize that, during the first quarter of 2018, the real ECI did nothing special – at best.

The story is just as unexciting – and contrary to accelerating wage inflation claims – in the private sector. Its real ECI increased by 0.39 percent annually during the first quarter, and also fell (by 0.19 percent) sequentially.

Between the previous first quarters, the real ECI flat-lined, too, after advancing by 0.97 percent the year before and 2.70 percent the year before that.

Some day, American workers may actually experience another genuine acceleration in their real compensation, and thus a genuine increase in their living standards. But looking at the most revealing version of the Employment Cost Index makes painfully clear that that day still lies in the future.

(What’s Left of) Our Economy: A New Set of Mixed Signals on Worker Pay

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ECI, Employment Cost Index, inflation, Jobs, manufacturing, recovery, wages, workers, {What's Left of) Our Economy

Is the long-beleaguered American worker finally starting to see some significant compensation benefits from an unemployment rate that’s been falling toward historic lows? Some data that provides possibly the most important evidence came out this morning, and the answer is a firm “Maybe.”

I’m talking about the Labor Department’s Employment Cost Index (ECI) – but not the series that usually attracts the most attention, which isn’t adjusted for inflation. What’s not widely known is that Labor also puts out real ECI reports, and the latest paints to an unusually ambiguous “glass half empty-half full picture.” Not to mention how hazardous it always is to draw conclusions over short-term changes.

To remind, the ECI arguably is a better gauge of worker pay since it counts not only hourly wages but benefits. And as usual, we’ll focus on private sector workers. (I don’t bother with government workers, since their compensation largely reflects politicians’ decisions, not economic fundamentals.)

Optimists will note that the new fourth quarter, 2017 report shows that the private sector ECI rose sequentially by 0.48 percent. That’s the biggest such percentage increase since the fourth quarter, 2015’s 0.97 percent, and sure beats the heck out of the third quarter’s 0.10 percent dip.

But pessimists will note that that 2015 improvement vanished almost instantly. As for the annual change, the 0.48 percent rise was nothing special. It beat the third quarter’s 0.29 percent, but trailed the second quarter’s 0.68 percent.

Also supporting the pessimists’ case has been the inflation-adjusted ECI’s performance during the current economic recovery versus that for the previous expansion. (The real ECI data set only goes back to 2001).

Since the second quarter of 2009, constant-dollar private sector employment costs are up 4.20 percent. That’s actually better than the 2.36 percent achieved during the previous recovery. But that expansion lasted only six years (from the fourth quarter of 2001 through the fourth quarter of 2007). The current recovery is more than eight years old. Over its first six years, after-inflation employment costs were up just 1.70 percent.

Manufacturing’s real ECI performance was somewhat better. The fourth quarter’s 0.57 percent rise was the best sequential advance since the third quarter of 2015 (0.70 percent). But the 2017 annual increase – also 0.57 percent) was the highest only since the third quarter of 2016 (0.99 percent).

The most significant sign of progress in industry comes from the recovery-to-recovery comparison. During this expansion, price-adjusted employment costs for manufacturing have risen by 5.65 percent. That’s considerably faster than the 1.99 percent during the previous recovery, as is the current recovery’s advance during its first six years – 2.98 percent. So maybe these latest gains stand a better chance of lasting than those of their private sector counterparts?

But there’s no shortage of reasons for continued uncertainty. A bunch of minimum wage hikes across the country have kicked in this month, which should influence the next set of real ECI data. The new business tax cuts may help as well. And don’t forget the certainty of rising federal budget deficits, either with or without a big boost in infrastructure spending. Hanging over the future also, however, is the strong likelihood of continued Federal Reserve monetary tightening – and how interest rate hikes may be interpreted by businesses. All of which means that the next real ECI report – due out at the end of April – will merit unusually close scrutiny.

(What’s Left of) Our Economy: Even a U.S. Growth Pickup Keeps Leaving Wages Behind

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benefits, Employment Cost Index, Immigration, inflation-adjusted wages, Labor Department, manufacturing, offshoring, recovery, salaries, Trade, wages, {What's Left of) Our Economy

Government data released yesterday morning make clear that the supposed biggest mystery surrounding the American economy remains as big as ever – and may have become even bigger. I’m talking about the Labor Department’s quarterly report on employment costs – the broadest official measure of compensation available. It continues a wave of statistics demonstrating that although the nation’s economic growth rate is quickening some, virtually none of this progress is showing up in American workers’ combined paychecks or benefits levels.

The figures are contained in Labor’s third quarter Employment Cost Index, and although the pre-inflation numbers usually attract the most attention, the most important news was in the price-adjusted data. They showed the third quarter-to-quarter drop in this combination of private sector wages, salaries, and benefits since the middle of last year. (I focus on the private sector, because in the public sector, compensation largely stems from politicians’ choices, not from the fundamentals of the economy.)

The drop wasn’t big – 0.1 percent. But it was enough to drag down the year-on-year change to 0.29 percent.

These inflation-adjusted employment cost numbers don’t go back past 2001. But they still allow comparison between the current economic recovery and its predecessor. During the expansion that lasted between the end of 2001 and the end of 2007 (not widely considered a golden age for U.S. workers), private sector employment costs rose a total of 2.36 percent. During the current, ongoing expansion, which began in mid-2009, it’s up 3.70 percent.

But don’t assume that we’re seeing progress. After all, that previous expansion lasted 24 quarters. Today’s is 33 quarters old.

Manufacturing workers have fared somewhat better, especially over the longer term. The quarter-to-quarter and year-on-year change in their inflation-adjusted employment costs was the same as for the private sector overall.

Their employment costs increased only 1.99 percent in real terms during the last recovery – a slower pace than for private sector workers in general. During this recovery, it’s been considerably faster: 5.03 percent. At the same time, last year’s numbers do indicate a slowdown.

All told, since the last decade’s recovery began, overall compensation for manufacturing workers has grown by 7.34 percent in constant dollars, versus only 6.58 percent for the private sector in toto.

Keep in mind, moreover, that these figures span a period of sixteen years.

Keep in mind also that a crucial reason for this pay stagnation looks to be staring supposedly mystified policymakers right in the face – the two-way globalization whammy that’s hit the American workforce over the last two and a half decades. Thanks to offshoring focused trade deals and mass immigration, businesses operating in the United States have been able to access massive, very low wage foreign workers either by sending production overseas, or by pushing policymakers to help bring them to America.

Further, as is even more often overlooked, the job doesn’t need to go overseas, or be replaced by an immigrant, for these policies to impact U.S. labor markets. The very possibility has surely scared American workers enough to keep wage demands subdued – at best.

Interestingly, of course, these developments haven’t escaped the notice of many of the American workers who vote. That’s no doubt a major reason why Donald Trump is president. But it also signals that unless he’s more effective on the trade and immigration fronts, he could be replaced on his job as well.

(What’s Left of) Our Economy: New Evidence of a Crossroads for the U.S. Jobs Market

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benefits, compensation, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor market, labor unions, private sector, recovery, salaries, wages, {What's Left of) Our Economy

If you’re one of the American workers who’s been happy with the current economic recovery, you might have already seen peak pay gains. If you haven’t been satisfied, get ready for greater disappointment. And whatever category you fall into, you’d better hope that new U.S. government data on overall compensation paid by American employers is just a blip. Ditto that for the Federal Reserve, which is set to announce its latest decision on interest rates later today, and which seems convinced that the American labor market is healthy enough to withstand a series of hikes back toward historically normal levels.

Last week, the Labor Department issued its latest quarterly report on how much business shells out in terms of both wages, salaries, and benefits. The results in the main release looked pretty good, but they’re not adjusted for inflation – which means that they don’t tell the full story about whether or not compensation is keeping up with the cost of living. Luckily, Labor released the inflation-adjusted figures, too, and they make clear that whatever real compensation progress workers might have been recently been making could be in danger.

According to these constant-dollar Employment Cost Index (ECI) figures, real pay for all private sector workers was flat year-on-year for the quarter ending in March. (I don’t usually examine pay data that include government workers because their compensation is set overwhelmingly by political decisions, not market forces, and therefore don’t say much about the underlying strength of the labor market or the broader economy.)

That annual result was the worst since the quarter ending in June, 2014 – when after-inflation compensation also flatlined on an annual basis. By comparison, the real ECI between that first quarter of 2015 and the first quarter of 2016 rose by 0.97 percent.

Looked at quarter-to-quarter, the real ECI for private sector workers fell by 0.10 percent. The previous sequential change was a 0.29 percent improvement. Indeed, the latest numbers broke a two-quarter string of gains.

From a longer-range perspective, however, the current recovery still stacks up pretty well for private sector workers (although the data only go back to mid-2001). Since it began, in mid-2009, their total compensation is up by 3.60 percent. During the previous (shorter) expansion – which ran from late 2001 through late 2007, total inflation-adjusted compensation rose by only 2.36 percent.

The new real ECI results reveal similar trends for American manufacturing workers. The first quarter’s year-on-year 0.20 percent drop was the worst such result since an identical decrease in the final quarter of 2012. And the previous first quarter annual change was a 1.49 percent rise.

Sequentially, real manufacturing compensation also fell during the first quarter – by 0.29 percent. And as with overall private sector compensation, that was the first such decline in three quarters.

Interestingly, in terms of real total compensation, the current recovery has been a winner for manufacturing workers to an even greater extent than for all private sector workers. Combined constant dollar employer costs for wages, salaries, and benefits have risen by 4.72 percent – compared with a 1.99 percent advance during the previous recovery. (RealityChek regulars will note that these results contrast strikingly with those for wages alone, where manufacturing has been a major laggard. One reason is surely manufacturing’s relatively high unionization rate – which typically results in better benefits won and kept.)

If the Federal Reserve decides today to raise the federal funds rate it controls directly, or even if it simply stays determined to remains on a tightening path, it would signal its confidence that the American labor market remains on the mend following devastating losses during the last recession. Any doubts the central bank voices about its current strategy might indicate that it’s genuinely worried about the new ECI statistics – and that U.S. workers should be, too.

(What’s Left of) Our Economy: Real Wage Trends Seem to Clash with the Fed’s Rate Hike Decision

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ECI, Employment Cost Index, Federal Reserve, inflation-adjusted wages, interest rates, Janet Yellen, labor market, real wages, recovery, wages, {What's Left of) Our Economy

As I’m sure most of you know, the Federal Reserve this week decided to raise the short-term interest rate it controls directly by a quarter of a percentage point – to a range of between 0.50 percent to 0.75 percent. (This “Fed funds rate” is officially a target and is always expressed as a range.) And since the Fed funds rate can strongly influence borrowing costs throughout the economy, the hike – all else equal – is likeliest to slow growth in the short run at least. It’s the price that the central bank thinks the nation needs to pay to ward off inflation, and start returning rates to the historically normal levels widely thought to be essential for long-term economic health.

This key Fed decision (only the second rate hike in more than nine years), still leaves the funds rate near all-time lows. I won’t comment here on the wisdom of this move. But the timing makes me wonder if the central bankers had seen the latest American inflation-adjusted wage figures. For although Chair Janet Yellen has made clear her belief that the U.S. labor market keeps improving enough to warrant such tightening, the new real wage numbers look like they’re sending the opposite message.

Let’s start with the after-inflation wage figures that came out on Thursday. They showed that these wages in the private sector fell in November by 0.37 percent over October levels. That’s the worst monthly performance since the 0.39 percent decrease in February, 2013. Moreover, in October, real wages inched up by only 0.09 percent. Is the wheel turning? (The wage figures don’t include government workers because their compensation is set largely by politicians’ decisions, not market forces. Therefore, they reveal little about the underlying state of the economy.)

The year-on-year results don’t provide much encouragement, either. These wages’ 0.75 percent growth was the most sluggish since the 0.29 percent annual improvement in October, 2014. Between the previous Novembers, real wages advanced by 1.92 percent.

As a result, real wages since the current recovery began in mid-2009 are up only 3.59 percent. That’s over a more than seven-year stretch!

The picture if anything looks worse in manufacturing. There, November inflation-adjusted wages sank by 0.73 percent on month – the biggest decrease since the 0.76 percent falloff in August, 2012. In October, these wages increased by 0.28 percent on month.

The annual November data? Real manufacturing wages rose by just 0.93 percent year-on-year. That’s the slowest pace since the 0.38 percent in December, 2014. From November, 2014 to November, 2015, price-adjusted manufacturing wages increased by 1.90 percent.

And since the current recovery began, constant dollar manufacturing wages have risen only by 0.84 percent. That’s almost a rounding error.

Many economy bulls insist that the wage figures aren’t all that helpful, because they leave out non-wage benefits like health insurance coverage. The government keeps overall compensation data, too. But in inflation-adjusted form, they come out on a slightly less timely basis than the wage figures. All the same, we have them through the third quarter of this year, and they’re somewhat better – though not game changers.

Between the second quarter and third quarters, the Employment Cost Index (ECI) that captures these trends increased by 0.29 percent in real terms for the private sector. That’s a distinct improvement ove the 0.48 percent sequential decrease in the second quarter, but hardly torrid, since we’re talking about a three-month period.

Indeed, in the third quarter, the after-inflation ECI was up only 0.78 percent year-on-year – much less than the 1.89 percent rise the year before.

A little more impressive is the real ECI over the longer-term. During the current recovery, it’s increased by 3.40 percent after inflation. That’s better than the 2.36 percent increase during the previous recovery. But don’t forget – that expansion only last six years (from the end of 2001 to the end of 2007).

Better yet are the manufacturing ECI numbers. The last quarterly increase was also 0.29 percent – and it followed a second quarter drop almost identical to the private sector’s (0.49 percent). But year-on-year, the real manufacturing ECI was up faster than the overall private sector ECI (0.89 percent), though that, too, represented a big dropoff from the previous annual increase of 2.33 percent.

The real manufacturing ECI is also up a good deal more during this recovery than the overall private sector ECI – 4.72 percent. And that’s a nice improvement over the previous recovery’s 1.99 percent, even considering their different durations.

Chair Yellen and her Fed colleagues keep insisting that their interest rate decisions have depended on how the latest economic statistics have been looking. Which tells me that, last week, the central bankers must have been looking at data other than the real wage and compensation figures.

(What’s Left of) Our Economy: The Wage Inflation Story is Getting More Complicated

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compensation, ECI, Employment Cost Index, inflation, Labor Department, minimum wage, pay, wages, {What's Left of) Our Economy

Last week more evidence came in concerning claims that America is undergoing or verging on a new round of dangerous wage inflation (or any wage inflation), and the government has just provided a special bonus! The good people at the Labor Department, which tracks these trends, recently informed me that it not only keeps figures on overall compensation (the Employment Cost Index, or ECI), but that it also adjusts these numbers for inflation. So it’s possible to get a better fix on whether pay is keeping up with or trailing price changes in the rest of the economy – and also on how U.S. compensation nowadays has been performing in historical perspective.

First, the pre-inflation results from the latest ECI – which covers the second quarter of this year. For all private sector workers (whose pay is set largely by market forces, not government decisions), wages, salaries, and benefits combined increased by 2.35 percent over the second quarter of 2015. That’s better than the 1.79 percent year-on-year rise for the first quarter, and than the 1.90 percent improvement registered between the second quarters of 2014 and 2015. In fact, it’s the best year-on-year gain during the current recovery.

The trouble is, the current recovery is still a low bar. Annual increases dwarfing that 2.35 percent were common beforehand, and going back to 2001 (when the ECI was created). In fact, during the seven years of expansion covered by these latest ECI data, employment costs have risen by 15.16 percent total. That’s still well behind the 21.71 percent total increase during the previous recovery – which lasted only six years, and which is not widely viewed as a Golden Age for employees.  

Further, we shouldn’t forget about the impact of the latest burst of state and local level minimum wage hikes. However overdue you think they are or aren’t, it’s important to recognize that they have nothing to do with the underlying strength or weakness of labor markets.

When you adjust for inflation, however, a more complicated story emerges. On the one hand, over the last two or so years, there’s definitely been some overall compensation acceleration. After going nowhere for most of the current recovery, the real ECI rose by 1.50 percent year-on-year in the fourth quarter of 2014, and by 2.70 percent in the first quarter of 2015 (when, to be sure, many of these minimum wage hikes kicked in).

Since then, although the annual rates of increase have slowed markedly, they’re still much better than during the recovery’s early phase. The big question they raise going forward is whether they can stay above one percent, especially since the economy’s growth is slowing markedly.

Over a longer period of time, the current recovery’s real ECI performance looks better historically speaking, but not by a wide margin. During its seven data years, overall compensation is up a total of 3.10 percent. The figure for the previous (six-year) expansion? 2.36 percent.

Moreover, during the 1980s expansion, which lasted slightly longer than seven years, the real ECI advanced by 4.25 percent. During the 1990s recovery, which ran just under a decade, the real ECI was up 7.61 percent. In other words, their annual average gains were both considerably better than those of the current expansion.  (The data for these previous expansions is found in a separate Labor Department report.)

So here’s one way to think about wage inflation: If your working memories or knowledge of the U.S. economy don’t go back past Y2K, you might legitimately be concerned. If you’re aware of the nation before this century, not nearly so much.

(What’s Left of) Our Economy: New Data (Further) Deflate Wage Inflation Claims

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benefits, compensation, ECI, Employment Cost Index, Jobs, salaries, wage inflation, wages, {What's Left of) Our Economy

I know that most mainstream economists are going to look at the latest figures on overall pay for American workers and keep claiming that the United States is experiencing or about to experience meaningful wage inflation. I just don’t know how they’re going to keep doing it in a way that convinces any fair-minded observers.

The data come from the Labor Department’s Employment Cost Index (ECI) and, to review, they’re the numbers that include both salaries and benefits as well as wages. Their two drawbacks are (1) they’re not adjusted for inflation; and (2) they’re issued quarterly, not monthly like the more closely followed wage statistics, so they’re not quite as timely.

Yet thanks to a (regular) quirk in the calendar, since we’re still in April, this newest ECI is timelier than usual. For it covers the first quarter of this year, which ended in March. And what it reports is that the year-on-year change in overall American workers total compensation – 1.79 percent – was not only much lower than that for first quarter, 2014-first quarter, 2015. The change, a drop of 34.91 percent from that previous 2.75 percent annual increase, also was the biggest such falloff by far since this trend began to be tracked in 2001. For good measure, the latest year-on-year change was the third weakest in absolute terms since then.

Matters don’t look any better when the current economic recovery is compared with its predecessor – the kind of analysis that produces the best (apples-to-apples) perspective. During the six-year economic expansion of the 2000s – which was largely fueled by bubbly borrowing and spending – the ECI rose by a total of 21.71 percent. During the current expansion, which has just become slightly longer, ECI is up 14.52 percent.

So it still seems perfectly justified to use “wages” and “inflation” in the same conversation. But putting them in the same (serious) sentence continues to get more difficult.

(What’s Left of) Our Economy: Wage Inflation Claims Keep Flunking the Laugh Test

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benefits, compensation, ECI, Employment Cost Index, salaries, wages, {What's Left of) Our Economy

Amid the excitement of last week’s Iowa Caucus homestretch, it was easy to overlook the Labor Department’s release of new data on overall U.S. pay levels. Even so, they deserved attention, because they represent yet another set of full-year 2015 figures that offer an unusually informative glimpse of where the economy stands. P.S. – they put yet another nail in the coffin of claims that American wages are taking off or about to.

Perhaps most surprising: A trend I spotted last year is holding: Pay gains have lagged badly in the professional, scientific, and technical services category – sectors that include many of those knowledge jobs widely considered crucial to the nation’s future competitiveness and prosperity, and where companies are constantly crying “Labor shortage!” and (successfully) demanding more immigrant workers.

The compensation figures make up the Employment Cost Index (ECI). They suffer two drawbacks compared with the wage numbers that come out each month in that they’re not adjusted for inflation, and they’re only issued quarterly. But the ECI measures salaries and benefits, too, so it reveals more about a larger share of the U.S. workforce. And what they reveal is not only slowing increases in overall compensation over the longer haul, but even over the past year.

According to these data, from the first quarter of 2014 to the first quarter of 2015, total pay in America grew by 2.75 percent before accounting for price changes. (I don’t bother looking at the numbers for public sector employees, because their pay reflects political decisions more than market forces, and therefore tell us little about the state of the economy.) In the fourth quarter, this growth had slowed to 1.88 percent.

Moreover, that fourth quarter annual increase was the third worst such performance since 2001-02, when this series begins. The worst came in the recession year 2008-09 (1.19 percent) and the second worst was 2011-12’s 1.82 percent. This is wage inflation?

The compensation picture doesn’t look much better – possibly unless you’re an employer – when we compare this recovery’s trends with that of its predecessor (the only one on record). That’s the economics world’s best version of apples-to-apples data (along with comparing recessions). During the six-year expansion of 2001-2007, the ECI rose by a total of 21.71 percent. During the current recovery, which has been slightly longer, this figure has been only 13.79 percent.

One relative bright spot: manufacturing. Over the past year, some pickup can be seen in the growth of compensation in that sector – from 2.37 percent annually during the first quarter to 2.50 percent in the fourth quarter. Moreover, that fourth quarter 2014-15 advance was manufacturing’s best fourth quarter increase since 2010-2011, and its improved every year since then.

The current recovery has seen smaller gains in the manufacturing ECI than during the last recovery. But the gap was smaller than for private sector workers as a whole: 21.21 percent versus 15.38 percent.

And compared with that high tech professional, scientific, and technical services, grouping, manufacturing pay was just killing it. In those allegedly labor-short industries, compensation not only grew more slowly over the last year – the growth rate cratered. During the first quarter, it rose by 3.61 percent over the first quarter of 2014. By the fourth quarter, this increase was down to 1.58 percent. That’s also the category’s third worst fourth-quarter-to-fourth quarter gain since government data started being published (for 2003-04). It trailed only 2004-05’s 1.31 percent, and recession-ary 2008-09’s 0.53 percent.

Over the last two recoveries, compensation in these sectors of the future looks dismal, too. During the previous expansion, it reached only 15.05 percent – but that only takes into account four years of data. If this growth rate is projected out to six years, however, it still only comes to 22.58 percent. That’s just slightly better than the pay growth for the private sector as a whole. But during the current recovery, professional, scientific, and technical services pay growth sank to 12.72 percent – meaningfully slower than that for the entire private sector.

As anyone schooled in economics knows, when anything is inflating, its costs should be rising ever faster. And when anything is in short supply, its costs should be inflating. That neither of these developments has been visible in the U.S. economy makes clear that those claiming wage inflation are either fools or – far more likely – self-seeking knaves.

(What’s Left of) Our Economy: Tech Labor Shortage My…Foot

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compensation, ECI, Employment Cost Index, immigrants, inflation, inflation-adjusted wages, labor shortages, skills gap, tech workers, wages, {What's Left of) Our Economy

So many myths were busted in today’s Employment Cost Index (ECI) report from the Labor Department, which should put the kibosh on wage inflation claims until…the next Employment Cost report. One of the most important is the longstanding notion that America is experiencing a scary shortage of high tech workers, and will fall hopelessly behind the rest of the world in the innovation race – with dangerous implications for national security and living standards – if the “skills gap” isn’t filled pronto with zillions of brainy immigrants.

The ECI data – which doesn’t adjust for inflation when it comes to detailed occupational and industry data – lacks information on technology workers per se. But it does provide statistics on pre-inflation total compensation (including non-wage benefits) for workers in the “professional, scientific, and technical services” field, which includes engineering and computer services.

Remember that textbook economics and common sense both tell us that when businesses can’t find the workers they want, they tend to react in one of two ways. They either increase pay to become more attractive to existing workers they need, and over the longer- term to draw more people into their field. Or they figure out a way to get the necessary work done by becoming more efficient – say, by buying or developing some gizmo that can replace human beings, or make their current employees more productive. (The textbooks, incidentally, don’t teach that businesses facing labor shortages typically lobby governments to boost immigration levels in order to create labor gluts and suppress wages – which seems to be the strategy of choice in Corporate America nowadays.)

Of course, economics also teaches that employers urgently needing more workers will try various mixes of both approaches over time. But those facing genuine shortages usually can’t afford to skimp on pay. Why, then, do the data on total compensation for “professional, scientific, and technical services workers” show that that’s exactly what’s happening to compensation?

The new ECI numbers covered the quarter ending in June, and deep in the Labor Department website, you can find statistics going back to 2001. Since that June, here’s how pay has improved over each previous June quarter:

2000-01: 3.4%

2001-02: 2.4%

2002-03: 2.1%

2003-04: 4.5%

2004-05: 2.6%

2005-06: 3.1%

2006-07: 4.7%

2007-08: 4.1%

2008-09: 2.0%

2009-10: 1.4%

2010-11: 3.0%

2011-12: 1.5% 

2012-13: 2.0% 

2013-14: 1.7% 

2014-15: 1.1% 

Do these look like the kinds of pay raises given out by businesses that are desperate to hire? It’s clear that total compensation increases slowed down considerably once the Great Recession took hold in 2008-09. But why should even that deep downturn have produced the dramatic deceleration revealed here? After all, we’re talking about the industries of the future – sectors and companies that are generating outsized growth because they’ve not only found brilliant new ways to meet wants and needs the rest of the economy already has, but because they’re great at identifying completely new wants and needs.  And anyway, the recession ended more than six years ago – remember?

But here’s a finding that’s even more stunning – and destructive to claims of tech worker shortages: For the last three years, total pay for the private sector workforce overall has risen faster than total pay for the professional and scientific etc. workers. 

Lying about the hiring picture isn’t exactly admirable behavior, but we’re talking about businesses here.  They’re supposed to be obsessed with making money in any legal way possible.  But elected officials who swallow their propaganda presumably have a different set of responsibilities.  If I can find information debunking their labor shortage claims, so can the politicians.  Why haven’t they?