No Raises For Anyone: Real Hourly Wages Decline For The First Time Since 2012

In order to justify the US "recovery", one of the recurring themes has been that wages of US workers are going up.... any minute now.

And since any minute now has been the common refrain for about five years now, some are getting skeptical. Not us: we have known since 2009 that the Fed's "plan" of making billionaires trillionaires fixing the economy won't work from the start, but we are always willing to be convinced otherwise.

So for all those who keep warning that wage inflation is just around the corner (you know who you are), please point out on the chart below - which shows that real hourly wages just had their first annual decline since October 2012 - where this wage inflation is so stubbornly hiding?

 

And in absolute terms:

 

And some additional insight from the ECRI's Lakshman Achuthan:

Earnings growth has risen for an unwelcome reason – because growth in hours has fallen faster than pay growth. As bad as that is for income growth, it is also not a credible signal of an inflation upturn.

Given the ongoing taper, the Fed, like most other observers, remains optimistic about economic prospects. In turn, a number of economists are focusing on “bullish” indicators of employment and inflation, particularly growth in average hourly earnings (AHE), which has been rising since late 2012. This strengthening has been taken by some to mean there is less slack in the labor market and wage growth is rising. Yet, is the rise in AHE actually indicative of strengthening labor-market fundamentals, particularly inflationary pressures? We turn to our cyclical framework for answers.

For the overall private sector, year-over-year (yoy) growth in AHE has indeed risen noticeably since October 2012.



Since AHE is the ratio of total weekly pay to total weekly hours, it is instructive to look at the growth rates of each, shown in the lower panel of the chart (purple and gold lines, respectively). From this perspective, the real story emerges. Year-over-year growth in both pay and hours has actually been falling since early 2012, with the declines steepening since last summer and the divergence between the two increasing, particularly in recent months. In other words, while rising yoy AHE growth may seem like a good thing, in this case it is actually underpinned by cyclical downturns in the components that comprise it.

Clearly, there are both straightforward and misleading reasons for increasing AHE growth – those which stem from underlying strengthening of hours and pay growth, and those which arise from a technicality, where both indicators are actually falling, or are little changed.

The bottom line is that the current rise in overall AHE growth is not a sign of strength. In most industries, yoy AHE growth has either declined, been essentially unchanged, or has risen for misleading reasons, proffering false hope.

Therefore, the commonly-touted “upturn” in earnings growth is largely illusory, and does not really point to a healing in the labor market, or necessarily imply a welcome rise in inflation, as some claim. It is risky to presume, based on AHE, that policy action has effectively achieved its goals of boosting inflation and healing the labor market. This is even more troubling in the context of the “yo-yo years” environment of weakening trend growth and more frequent recessions than most expect.