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White House economists believe that wage growth measures should be re-examined to take into account the aging of workers, different inflation measures and changes in the way workers are compensated.
Their alternative approach, detailed in a paper released Wednesday by the Council of Economic Advisers, notes a much larger gain last year compared to the flagship measures. Their methodology shows a relatively stable pace of annual wage growth over the last three years, exceeding the measure of the Department of Labor's inflation-adjusted wage growth.
"Consumer confidence has reached its highest level in 20 years, business confidence is up and GDP growth has exceeded 4%," said White House economist Kevin Hassett. "But some salary measures seem to be incompatible with all this good news. Traditional wage measures do not accurately reflect the growth of US workers' compensation because they do not reflect benefits, tax cuts and bonuses. "
The Department of Labor reports that average inflation-adjusted hourly earnings increased by only 0.1% in the second quarter compared to the previous year. The Democrats have seized these lump-sum wages to support strong economic growth since President Trump did not take office, which does not benefit all workers.
The White House is pushing back. Using the economic advisers methodology, adjusted wages increased by 1.0% in the second quarter compared to the previous year. By also including lower taxes, which boosted the net salary, compensation is up 1.4% over the previous year. Reduction of tax cuts is expected to improve over the next year as the effects of the law are fully realized.
However, the White House methodology shows that adjusted wage increases are increasing this year at a slower pace than in 2015, the year in which the inflation rate was lower.
According to White House economists, changes in the labor force are a determining factor in overall measures of wage growth. Baby boomers, many of whom are high-paid, retire in greater numbers and are replaced by entry-level or less-experienced workers who receive lower wages. The methodology of the White House takes into account these demographic evolutions.
The historically low unemployment rate also attracts some workers, including those who do not have a high school diploma and unequal work history. These workers also tend to be paid less, which lowers the average, even if they see more and more paycheques. But White House economists have not been able to fully adapt to differences in skills and education.
Wage growth was much stronger in 2009 than in recent years, while the opposite trend occurred. Less skilled and less experienced workers have lost their jobs while employers have retained relatively older and better paid employees.
Another factor is that a larger share of workers' compensation comes in forms other than wages, including health benefits, paid holidays and bonuses. This is a trend that has been going on for at least a decade.
"When we take these factors into account, real wage growth looks much healthier," Hassett said.
It remains to be seen how to adjust wages according to inflation. The Department of Labor adjusts wages using the consumer price index. Some economists say this is a good measure to use because it reflects only personal expenses and not those purchased on behalf of consumers by their employers or the government, including health care.
Other economists, including those in the White House and the Federal Reserve, prefer Commerce's measure, the consumer and consumer price index. This measure incorporates consumers substituting products when prices rise and tends to show lower inflation levels.
The PCE index is also more focused on health care costs, which have slowed down. The CPI is more focused on housing costs, which have increased more rapidly.
Falling inflation rates translate into higher real wage growth.
Write to Eric Morath at [email protected]
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