Not So Fast: This Is Where All The "Blistering" Hourly Earnings Growth Came From

There is a simple reason why the vast majority of American workers, some 82% of them, are not feeling any wage growth: there simply isn't any.

After today's jobs report, Wall Street has been fast to ignore the modest headline payrolls disappointment, which in December rose less than expected following an upward revised November, and focus exclusively on that "other" number, the jump in average hourly earnings, which in December rose 0.4% on a monthly basis, and a blistering 2.9% Y/Y, the highest annual growth since the financial crisis, as shown in the chart below.

Wall Street analysts were quick to praise the jump in hourly earnings, such as Deutsche Bank's Alan Ruskin who said the following:

The particular medium-term relevance of the acceleration in earnings is:

i) this is coming well before any fiscal stimulus hits, and underscores the unusual timing and therefore inflationary influence that a fiscal stimulus can have at this point in the business cycle;

ii) it tends to provide evidence that indeed the economy is at full employment and that estimates of the nature rate are not apt to drift much lower, negating some of the spare capacity participation arguments that would suggest otherwise.

iii) it plays to the idea that the Fed may already be behind the curve, not least because the impetus from lower oil prices has turned more inflationary as well.

A nice analysis, there is just one problem: it may well be totally wrong.

As we try to point out every month, this headline hourly earnings number - impressive as it may be - tells an incomplete story as it consolidates earnings for two very distinct labor groups in the US, production & nonsupervisory employees, which comprise the vast majority, or 82.3% of the labor force, and the top echelon of workers, the 17.7% of private workers who are classified as supervisory, and managerial.

What happens when one looks at just the subset of production and nonsupervisory private workers, which in October amounted to 101.3 million, or just over 82% of the entire private workforce? Well, we find that their wage growth story is very different. According to the BLS, these particular workers made on average $21.80 per hour, up only 2.5% from $21.26 a year ago, which as the chart below shows is where wage growth for this group has been for three years, and after a modest dip in late 2014, has been largely unchanged since the start of 2014.

Indicatively, this particular group of workers saw a 4% annual growth in wages at the time the 2007 recession hit.

In other words, for the vast majority of American workers, real wage growth is still as anemic as it has been for years, barely outpacing official measures of inflation. 

So where did the wage growth come from? Simple: the 17.7% of supervisory, managerial private workers that are excluded from the above grouping, but make up the balance of America's 123.1 million private workers. It is this group that saw a surge in their implied average wages, which soared by a record high 4.7% in December!

So when the Fed sits down next time to pats itself on the back for a job hike well done in hopes of "keeping inflation in check", it may want to hike rates only for those 18% of workers who are benefitting from rising wages, because for the rest of America, the income picture remains as dreary as it has been for years.

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PS: in this above post we did not discuss something which may be even more troubling: while average hourly earnings are indeed rising (if mostly for managerial employees), on a weekly basis, there is barely any earnings growth.

This means that the only reason why wage growth appears to be rising, if purely for optical reasons, is because number of hours worked continues to decline, hardly an indicator of a stable recovery.


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