I began utilizing the Atlanta Fed’s Wage Progress Tracker for financial evaluation about 10 years in the past. Since I am about to retire after 26 years on the Atlanta Fed, now looks like a great time to look again on the historical past of the Tracker, and it is also a possibility to remind customers of what it’s and, maybe extra importantly, what it’s not.
The origin story has three elements. The primary is the easy remark that companies don’t lay off (or rent) employees randomly. For instance, dealing with sharply decrease demand for his or her items and providers in the course of the Nice Recession of 2008–09, many companies decreased their staffing ranges. Nonetheless, these layoffs tended to be concentrated amongst comparatively lower-paying jobs. Though this had the impact of lowering the agency’s complete wage invoice, it additionally mechanically brought on the typical wage per job to rise. Considerably counterintuitively, this meant that measures of mixture wage development such because the change in common (per job) hourly earnings from the US Bureau of Labor Statistics’s payroll survey rose at a time when labor demand was very weak. Chart 1 exhibits this “composition impact,” the place you’ll be able to see the year-over-year development in private-sector common hourly earnings from the payroll survey. It’s also possible to see that the composition impact is much more dramatic in the course of the lockdown interval of the COVID-19 pandemic in 2020.
The rise in common wages in the course of the Nice Recession led to other ways to take a look at the cyclicality of wage development that aren’t affected by modifications within the composition of employment—and this results in the second a part of the origin story. On the similar time, Fed colleagues Mary Daly (president of the San Francisco Fed) and Bart Hobijn (a senior economist on the Chicago Fed) have been utilizing the quick panel construction of the Present Inhabitants Survey (CPS) to check the truth that throughout financial downturns companies have been extra prone to freeze employees’ wages than to chop their wages, regardless that employees have been in a weak bargaining place (see right here, for instance). What they did was match up the reported wage of the pattern of employees within the outgoing rotation of the CPS to what was reported for those self same employees a 12 months earlier, after which they computed the fraction of particular person wage modifications that have been zero. They discovered a countercyclical sample of wage rigidity; that’s, wage freezes are extra doubtless when labor demand is weak.
Their remark bought us fascinated by the cyclical conduct of the “typical” wage development expertise of employees and whether or not there would variations throughout forms of employees, reminiscent of those that modified jobs versus those that did not, or youthful versus older employees, or these in comparatively low- versus higher-wage jobs. This query results in the third a part of the Tracker’s origin story. My laptop programing abilities, like my typing abilities, are very a lot of the “hunt and peck” selection. Fortuitously, I had a proficient and enthusiastic colleague, Ellie Terry, who did numerous the heavy lifting concerned in coding the Wage Progress Tracker and developing numerous cuts of the info. She was additionally instrumental in creating a model of your complete CPS dataset that linked folks over time (inside the panel construction of the CPS) and had constant variable names and definitions. Ever since, I’ve usually used this dataset for my day-to-day evaluation of CPS knowledge.
As a result of the cross-sectional distribution of wage development in that CPS dataset is broad and skewed, we determined to make use of the median as a statistically sturdy measure of “typical.” Nonetheless, customers ought to needless to say, for quite a lot of causes, the pattern used to estimate the median is comparatively small. First, the survey asks incomes questions of solely a couple of quarter of the folks in CPS panel every month. Second, lots of people do not present their earnings data, so the Census Bureau imputes their lacking knowledge. We determined to exclude imputed wages as a result of we discovered that they added appreciable noise to the estimates. Third, we exclude wages which can be top-coded, or censored, as that top-coding would present up as zero wage change. Between 2003 and 2022, the annualized wage top-code most utilized by the Census Bureau was $150,000. On the different excessive, we exclude observations if the hourly wage is implausibly low (lower than federal minimal for tip-based jobs of $2.13 an hour). This left between 1,500 and a couple of,000 wage development observations every month. Given the comparatively small pattern of wage development observations, it was clear that the info couldn’t be sliced very finely. For instance, it could not make sense to indicate a Wage Progress Tracker time sequence at a state stage. As well as, some smoothing of the time sequence of median estimates was essential. A number of sequence are proven as a three-month transferring common, whereas cuts of the info with extra disaggregated groupings are solely proven as 12-month transferring averages.
The mixture of smoothing and the truth that we’re wanting on the year-over-year change in wages implies that the Tracker is a considerably lagging indicator of modifications in labor market tightness. You’ll be able to see this in chart 2, which exhibits the three-month common model of the general Wage Progress Tracker plotted together with a measure of the job emptiness charge from the BLS’s Job Openings and Labor Turnover Survey. The massive swings within the emptiness charge knowledge begin a number of months earlier than the swings within the Tracker knowledge.
To recap, the Wage Progress Tracker is a time-series of the “typical” wage development expertise of the pattern of employees who’re employed within the present month and a 12 months earlier. Consequently, the Tracker isn’t a measure of the everyday wage development expertise of the inhabitants of everybody employed in a given month as a result of a number of the folks working weren’t employed a 12 months in the past (their wage development can be infinitely massive), and vice versa. As a result of intermittent employment is extra frequent amongst youthful and fewer educated populations, the Wage Progress Tracker pattern is older and extra educated than the general employed inhabitants. Nonetheless, we do have one model of the Tracker that’s weighted to be extra consultant of the employed inhabitants in every month—basically by giving extra weight to youthful and fewer educated employees. One other model makes the Tracker knowledge extra consultant of the employed inhabitants in 1997. We created the 1997 model as a result of, regardless that the median wage development for every month is constructed by evaluating the wages of the identical folks, the demographic composition of the working inhabitants has modified over time. Particularly, it’s older and extra educated on common than in 1997.
It is also vital to needless to say the wage knowledge within the CPS have a number of limitations, together with that it’s self-reported (actually, the survey respondent is reporting wage data for everybody within the family), top-coded (censored), and now rounded. The pattern measurement of the CPS has additionally declined considerably within the wake of the COVID-19 pandemic, as has the willingness of individuals to report wage data.
Regardless of its numerous limitations, the Wage Progress Tracker has proved to be a helpful and fashionable financial indicator. The excellence between the wage development expertise of these altering jobs has been particularly vital within the current tight labor market, as was the speedy rise within the wage development of these within the decrease a part of the earnings distribution. The recognition of the Tracker has additionally contributed to the event of different methods to take a look at wage development. For instance, the job website Certainly has created a wage development measure utilizing the Tracker methodology however utilized to matched job posting knowledge, whereas the ADP Analysis Institute has utilized the Tracker methodology to matched payroll transactions knowledge. I believe these are terrific developments, and I encourage additional analysis on this space.
I am indebted to the assistance and dedication of the Atlanta Fed employees over time that made the event of the Wage Progress Tracker and its public dissemination attainable. Not solely has the Tracker been a frequent matter right here in Coverage Hub: Macroblog, nevertheless it has been routinely cited in information tales on the economic system and referenced by coverage makers, together with in speeches by Atlanta Fed president Raphael Bostic and Fed chair Jerome Powell. It has been cited within the Fed’s “Teal e-book” and even in reviews of overseas central banks such because the Financial institution of England’s quarterly Financial Coverage Report. The Wage Progress Tracker will proceed to be produced going ahead, and though I’ll not be immediately concerned, I stay up for studying about what it continues to inform us concerning the state of the economic system, whereas additionally cringing a bit when folks misread it.
By John Robertson, senior coverage adviser and economist within the Atlanta Fed’s Analysis Division