What's In Your Paycheck? : The Indicator from Planet Money The pace of wage growth is one of the best indicators of economic health. But it can be measured with different methods. Each method tells a slightly different story about how the economy is doing.
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What's In Your Paycheck?

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What's In Your Paycheck?

What's In Your Paycheck?

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Hey, everyone. Welcome to THE INDICATOR where every day we tell you a short story about the economy. Today's story is about wage growth.


And we talk a lot about wage growth on this show because it is such an important measure of how the economy is doing and not just in an abstract sense. Wage growth really matters for individuals and families. It's whether they're getting paid more than they were last year and also whether their chances of finding or keeping a good job have gotten better.

GARCIA: But the truth is is that wage growth can be measured using a lot of different methods, and each of those methods has strengths and weaknesses. It can get kind of complicated.

VANEK SMITH: And, of course, complicated is what we do here at THE INDICATOR. And when we need someone to untangle some complicated data, we like to call Ernie Tedeschi. He is an economist who used to work for the Treasury Department. He is now in the private sector.

GARCIA: Would you say you're more of a data ninja as we referred to you last time?


GARCIA: Or like a data samurai because, like, if you think about it, what you kind of do is like you slice and dice data into little, tiny bits so that it's then easy to understand, you know what I mean?

TEDESCHI: My kids got a real kick out of data ninja. I think they would prefer ninja over samurai. I don't know. I'll ask them.


VANEK SMITH: I'm Stacey Vanek Smith.

GARCIA: And I'm Cardiff Garcia. Today on the show - three measures of wage growth that you have got to know, plus why each measure tells a slightly different story about the labor market and the economy and how to make sense of that.


GARCIA: When it comes to wage growth data, Ernie Tedeschi has a top three - three indicators that each tell you something different about wage growth.

VANEK SMITH: Indicator No. 1 - take a deep breath, prepare yourself - the average hourly earnings for all private-sector employees.

GARCIA: Good God.

VANEK SMITH: Woo. They really need to think about renaming these things, but basically this is just average hourly earnings.

GARCIA: Yeah, let's just call it that.

VANEK SMITH: And that is the first Planet Money Indicator - average hourly earnings.

GARCIA: And average hourly earnings is exactly what it sounds like. It's the average of how much American workers get paid per hour of work. And it comes from a government survey that goes to companies, not to people or to households. And the survey just asks those companies who are your workers and how much do you pay them.

VANEK SMITH: And this goes out to a lot of companies.

TEDESCHI: It goes out to enough employers where they get data on about a third of all American workers in a given month. So that...

GARCIA: Wow. That's a huge sample size.

TEDESCHI: It's a huge - so that's the biggest upside, I think, of average hourly earnings is that it covers a lot of people. And so it's a very reliable number.

GARCIA: And here is the story that average hourly earnings, this very reliable number, is telling us now.

TEDESCHI: So right now, that's telling us that the average hourly wage for all workers among all non-farm industries grew about 2.7 percent over the last year, over the last 12 months. So that is not a bad read at all.

GARCIA: Not bad at all. But there's one problem with this measure of wage growth. If you look at the five years after the recession ended, so roughly 2009 to the beginning of 2015, this measure shows that wages were only going up really, really slowly, and that might not have been totally accurate.

VANEK SMITH: Which is kind of good news.

GARCIA: Kind of, yeah.

VANEK SMITH: I mean, not for THE INDICATOR but for life. Anyway - but here is what might have been happening. So during the years after the recession, a lot of young people and low-income people were being hired after many of them had lost their jobs. And since their jobs tend to not pay very much, the very fact that they had been hired meant that they were holding down the average wage for the whole group.

TEDESCHI: Growth in average hourly earnings could be artificially low right now because, you know, now that the economy is recovering, firms are hiring back those low-skill, low-wage workers who get paid a little bit less than average.

GARCIA: Think about it this way. Let's say that last year, Stacey and I as hosts of this podcast each got paid 10 bucks an hour.

VANEK SMITH: I want a raise.

GARCIA: (Laughter) And this year, we got that raise, so now we're going to get paid 12 bucks an hour.

VANEK SMITH: I want a bigger raise.

GARCIA: Yeah, well, in this example, we got a 20 percent raise. Wage growth went up 20 percent in a year. But let's say that our team was doing so well financially that we also got to hire a new intern this year for six bucks an hour.

VANEK SMITH: We'll get you a raise.

GARCIA: Yeah. Well, that would drag down the average wage of the whole group but not because wages were suddenly going down. Stacey and I still got our 20 percent raise. It's just because we got to hire somebody because we were doing well.

VANEK SMITH: And economists call this a compositional effect because the composition of the group changed, and this happens in the labor market, too.

GARCIA: And that brings us to the second Planet Money indicator from Ernie.

VANEK SMITH: Indicator number two.

GARCIA: The Employment Cost Index - wah-wah-wah (ph).

VANEK SMITH: Well, it's better. It's not terrible as indicator names go. We're going to give it a B-minus. B? B, B-minus.

GARCIA: Yeah, it's better than the other one. The Employment Cost Index is a measure that does adjust for these compositional effects so that over time we are comparing wage growth for Stacey and me with wage growth for other people who are like Stacey and me. In other words, people with the same job title, the same skill set and in the same industry. And this means that hiring new people doesn't start to weirdly bring down the average.

VANEK SMITH: What would you say our skill set is (laughter)?

TEDESCHI: What that does is it means that we can look at ECI and we can say, OK, this should reflect what the average worker is seeing in terms of growth in their paychecks without the influence of workers coming in and out of employment.

GARCIA: And because of that, the Employment Cost Index shows a much clearer, a much smoother trend ever since the end of the recession in 2009. How much people were getting paid back then just was not growing very fast, only about 1.2 percent per year. But now it's better. In the last year, the Employment Cost Index has gone up by 2.9 percent, which is also not too bad.

VANEK SMITH: The Employment Cost Index is also different in a couple of other big ways, says Ernie. First, it measures total compensation, everything you get from your company, so not just the wages you see in your paycheck.

TEDESCHI: I mean, the big thing is health insurance. If you get health insurance from your employer, you know, that's compensation that your employer gives you. We may not think of it that way because, you know, we don't get to spend it. It's not take-home income that we put in our bank. But that - you know, from the employer's perspective, that is something that is of value - right? - and that they are giving you in return for your labor. If your employer contributes to a retirement plan, the portion of Social Security that your employer chips in - these are all parts of compensation.

VANEK SMITH: The second way that the Employment Cost Index is different is that it's a smaller survey, so Ernie says it might lose some of the reliability that you get from the bigger survey.

GARCIA: But on the whole, both of these measures, the average hourly earnings and the Employment Cost Index, are telling a similar story now, a story in which the average worker's annual raise is going up every year. But it's still not going up as fast as it was before the last recession. So there may still be room for improvement.

VANEK SMITH: We need a bigger raise.

GARCIA: A bigger raise - that's the lesson here, people.

VANEK SMITH: (Laughter) Takeaway. Ernie's third and last measure of wage growth tells a different story. This is the Atlanta Fed Wage Growth Tracker. And it is kind of a renegade. Unlike the other two measures, it shows that the pace of wage growth has actually decelerated in the last few years.

GARCIA: And again, this has to do with how it is measured. The Atlanta Fed Wage Growth Tracker is based on a survey of people rather than companies. So it's partly relying on people's memories rather than on what companies report. Also, the tracker only measures wages rather than total compensation. And what the survey does is that it asks workers who had jobs from one year to the next how much of a raise they got. And then it takes the number in the middle, the median, rather than an average.

VANEK SMITH: And Ernie says he has not yet quite figured out why the Atlanta Fed Wage Growth Tracker is going in a different direction from the other two measures.

TEDESCHI: I've tried to dig into the data to kind of do an autopsy of the Atlanta Fed Wage Tracker (ph) and see what's been driving it. And it - there isn't a good explanation for it. It just seems like there are just some people in a broad array of industries that are reporting lower wage growth.

GARCIA: Interesting. So a bit of a mystery and a number that contradicts the story being told by the other two measures of wage growth.

TEDESCHI: Yeah. I think that's a good way of putting it. And I would not look at this and say, oh, well, Atlanta Fed is clearly superior, so, you know, we need to accept Atlanta Fed and wonder what's going on with the other two. I would kind of go about it the other way. If I have two sort of reliable wage metrics that are saying one thing and one that's saying another thing, I would wonder, you know, is one wrong, or is there, like, some idiosyncratic thing in the third one that's been driving softer wage growth? And unfortunately, we don't know right now.

GARCIA: Well, since you said that you also were doing - you'd been trying to do an autopsy on the Atlanta Fed, that gives us another metaphor for you. You could be if not a data ninja or a data samurai a data surgeon.

TEDESCHI: Oh, data surgeon, there you go.

GARCIA: A data undertaker.


TEDESCHI: Data mortuary.

GARCIA: Right.

TEDESCHI: (Laughter) We should just - like, we should get progressively darker in our analogies.


GARCIA: Right. It's going to get worse and worse. This'll be a horror movie by the end of it.

TEDESCHI: Get to, like, data zombie at some point.


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