Expert Commentary

Real earnings in America: Parsing strong wage growth amid high inflation

News outlets often report on inflation, but they don’t always cover the interaction between inflation and earnings. Keep reading to learn about real and nominal wages, different gauges of inflation and the importance of narrative.

real earnings
(Joshua Hoehne / Unsplash)

On its face, 2021 was good for workers’ wallets. Average hourly earnings for most workers rose 6% from December 2020 to December 2021. In the two years since health officials identified COVID-19, average hourly earnings were up 12%, from $23.84 to $26.61, according to the U.S. Bureau of Labor Statistics.

Those figures are for what the bureau calls production and nonsupervisory employees, who draw their paychecks from a private company — not local, state or federal government agencies. This group includes workers involved in manufacturing, service and office jobs and makes up 81% of the private labor force.

That share has hardly budged in four decades.

Economists sometimes study the “production and nonsupervisory” category as a proxy for blue-collar workers, but it does not exclusively capture manufacturing, construction and other jobs typically considered “blue collar.” As long as an employee doesn’t supervise other employees, these workers include the caterer making $21 an hour, the car parts manufacturer making $24 an hour and the financial portfolio manager making $47 an hour.

Workers involved in construction, manufacturing and trade, transportation and utilities made up 37% of production and nonsupervisory employees in December 2021. Professional and business services, a category including lawyers, made up 17%. Other major categories include education and health services at 20% and leisure and hospitality at 13%. Information workers, which includes many news reporters, made up 2%.

The hourly earnings numbers don’t include the value of health insurance benefits or payroll deductions, such as tax withholdings, unemployment insurance or union dues. They do include overtime, sick and vacation pay. They come from the Current Employment Statistics survey, which the Bureau of Labor Statistics conducts each month among 145,000 businesses and government agencies. The bureau is an agency of the U.S. Department of Labor.

The numbers also do not tell the entire story of recent wage growth — because the value of money is not all told in raw numbers.

Nominal earnings, meet real earnings

The Department of Labor’s inflation calculation that gets widespread national and local news coverage is called the Consumer Price Index for All Urban Consumers. That measure is based on prices for goods and services in 75 urban areas surveyed from 6,000 housing units and 22,000 retailers, such as supermarkets and gas stations. Inflation estimates are also available at the state level and for certain metropolitan areas.

Nationally, prices were 7% higher in December 2021 than at the end of 2020 among the categories, or “basket of goods,” the labor department tracks: food, energy, certain services, and commodities like clothing and cars. Excluding food and energy, which tend to have larger price swings than other product categories, inflation stood at 5.5%.

News outlets often report on inflation, but they don’t always cover the interaction between inflation and earnings. Each month, on the same day the labor department publishes inflation numbers, it also publishes a measure of wages adjusted for inflation, called real earnings. Those numbers show how far today’s dollars would have gone four decades ago. For production and nonsupervisory employees, average real earnings were $9.66 an hour in December 2021. That means the average $26.61 an hour those workers take home would have had the same purchasing power as $9.66 in the early 1980s.

Nominal wages are easier to understand,” says Stephanie Thomas, a senior lecturer in economics at Cornell University. “It’s what’s reflected in your paycheck. When you get your raise at the end of the year, if there’s an adjustment made, it’s given in terms of nominal dollars, so it’s something people are familiar with. The nominal, of course, isn’t adjusted for inflation and it’s really not reflective of the formal economic idea, which is the basket of goods that you are able to purchase with those dollars.”

All told, real earnings for production and nonsupervisory workers stand at roughly the same level as in March 2020, according to the Current Employment Statistics survey. The average spiked to over $10 an hour in April and May of that year, but those figures were skewed because lower-wage employees, like restaurant workers, lost their jobs.

The combination of higher prices along with lower-wage workers re-entering the workforce means hourly earnings for production and nonsupervisory workers are stagnant since the start of the pandemic shutdown. Still, real earnings for those workers are historically high when looking back over the past half century.

As the pandemic took hold, the lowest earners suffered more

The brief spike in real earnings to $10 an hour for most private employees has been attributed to what economists call “compositional” effects. That broadly refers to the composition, or makeup, of a group.

Think of the caterer making $21 an hour, the car parts manufacturer making $24 an hour and the financial portfolio manager making $47 an hour. Together, they make an average of $32. Take out the caterer, and the hourly average jumps to $36.

This is what happened at the start of the pandemic. Many in-person jobs, like those in restaurants and bars, temporarily went away.

“It’s worthwhile pointing out that price inflation of the goods that we buy erode wage increases we might enjoy,” says Stanford University economist John Pencavel, who studies inequality and earnings. “But we can’t do for each group of workers what we would like to do, and that is to measure the prices of the goods that they purchase.”

The goods and services the labor department tracks for its headline inflation data are meant to capture, at a high level, the things many American consumers purchase day to day. We don’t know, for example, what exactly a 40-year-old hotel receptionist in Lebanon, Pennsylvania buys each month. Aside from economists who study the hotel industry, there is probably not strong demand for such detailed data, Pencavel says. 

Inflation and the ‘power of narrative’

Some economists note the stories we hear from friends and family and on the news can matter greatly when it comes to rising inflation. As Paul Krugman put it in his Jan. 25 New York Times column: “What’s going on? Surely it’s the power of narrative.”

Based on falling consumer sentiment since 2020, Krugman supposes people think the economy is not doing well because they see and read news stories on topics like high inflation, yet they remain “relatively upbeat” about their personal finances.

“The idea that Americans are down on the economy because price increases have outstripped wage growth has hardened into conventional wisdom,” Krugman writes. “And there’s obviously something to that. But the political reaction is disproportionate to the actual decline in real wages, and I’d argue that journalists are missing a large part of the story if they fail to realize that.”

Economists often point to the pandemic stimulus legislation signed by Presidents Donald Trump and Joe Biden as putting more money in people’s pockets, and eventually driving up demand for goods and services that supply chains have been unable to meet. Simply put, people want to spend, but there is not enough of the stuff they want.

Some retailers can adjust prices quickly — think of the corner gas station bumping the cost per gallon when the price of crude oil shoots up. Others, like furniture stores, place orders weeks or months before their goods hit showrooms. Those retailers take a best guess at how future inflation rates might affect the number of couches they sell.

“This will cause inflation to persist even when the economy is no longer ‘overheating,’” writes Williams College economist Kenneth Kuttner in a Jan. 18 Econofact article. “Rising inflation expectations are largely to blame for the persistence of the inflation of the 1970s, which remained elevated well after the booms of the late 1960s, early 1970s had run their course.”

Other inflation and wage data worth tracking

The Quarterly Census of Employment and Wages is another labor department data series to keep an eye on. Its advantage is that it is a census, not a survey, meaning there is no sampling error. In a sample, researchers gather information from a small part of a larger group, then extrapolate findings for the overall group. A census conveys direct information for all, or almost all, members of the group. The quarterly employment and wage census covers about 95% of all jobs in the U.S., drawn from states’ unemployment insurance administrative records.

The downside is that it is published less frequently than the Current Employment Statistics survey — and there’s a lag. The most recent release, from December 2021, is for the second quarter of 2021, so it’s about six months behind.

Still, some relatively simple number crunching can be useful. A recent Pew Research Center analysis found that weekly wage gains through the first half of 2021 varied widely across sectors — and since 2019, local messenger and local delivery workers have seen the greatest gains of all, more than 111%. (Think couriers delivering documents and packages within a single city or urban area.) But, based on this data series, we don’t yet know how workers’ wages fared in the second half of 2021.

It’s also worth noting that the labor department inflation rate that garners headlines is not the primary inflation gauge the Federal Reserve uses to inform its monetary policy decisions. The Federal Reserve, the nation’s central bank, uses the Personal Consumption Expenditures price index from the U.S. Department of Commerce, though bank economists also track the labor department’s inflation measure.

The central bank has a “dual mandate,” meaning its policy measures have two overarching goals: to encourage low unemployment and maintain stable prices. It generally aims for annual inflation of about 2%.

The commerce department’s inflation measure, excluding food and energy, rose 4.9% in December 2021 compared with the year before — 0.6% less than the labor department’s inflation number. The Federal Reserve prefers the commerce department measure because it includes a larger basket of goods than the consumer price index. The labor department, however, breaks down real earnings by industry, which is useful for understanding the types of workers gaining or losing ground in their paychecks.

Economic realities may differ by industry

The economy is like a carefully calibrated steampunk machine. Adjust the pressure on one valve and something’s got to give elsewhere. Gauges can show whether the machine is chugging along or about to burst, but what’s happening to the individual components inside the machine can be difficult to see. That’s why it’s worth thinking about longer-term historical performance of real earnings and how current changes in those earnings fit into big picture inflationary trends.

Real earnings
The economy. (Pixabay)

For example, oil and gas workers saw their real earnings dip in the first half of 2014, rebound in the second half of that year, fall throughout 2015 and then bounce back strongly in 2016. Inflation was historically low, while oil prices fell dramatically from the end of 2014 into 2015, remaining at or under $60 a barrel until early 2018.

Going back further, in all but five years from 1980 to 2003 real weekly wages and salaries for private and public employees rose among the highest 10% of earners, while the lowest-paid 10% of workers saw their real earnings fall in 10 of those years, according to a 2005 Bureau of Labor Statistics analysis.

The point is not to parse why earnings for oil and gas workers fluctuated recently, or why high-wage earners fared better throughout the 1980s and 1990s, but rather to call attention to the fact that different types of workers may be experiencing very different economic realities depending on their industries and pay.

The value of employment beyond a paycheck

Consider the recent experience of workers in sport leagues, which rely on in-person attendance to stay financially solvent. The National Basketball Association, for example, put its season on hold on March 11, 2020, then resumed play without fans in the stands on July 30 at an ESPN sports complex near Orlando, Florida. As arenas shuttered at the start of the pandemic, the spectator sports workforce plummeted from 158,000 employees in February 2020 to 83,000 in May 2020.

The job erosion in the spectator sports industry came primarily from production and nonsupervisory workers, who accounted for 94% of the total job loss during that period.

Although many workers have regained jobs lost at the outset of the pandemic, the private labor force, at 127 million workers as of December 2021, is down 2.6 million from the February 2020 peak of 129.7 million. It’s now roughly the same size it was in November 2018. The current levels are a substantial rise from the April 2020 pandemic low of 108 million.

It’s worth underscoring the extreme initial effects the pandemic had on the labor market. There were 1.5% fewer production and nonsupervisory employees in March 2020 than the month before. Those jobs dropped another 17% by April 2020. There had never been a month-over-month swing of more than 1% in either direction since 1964 — the first year of available federal labor data for those workers — after accounting for regular seasonal employment changes.

Of the 21 million private sector jobs that evaporated from February to April, 19.6 million were among production and nonsupervisory employees. Those workers gained back 11.5 million jobs — 59% of the initial drop — by December 2020, the final full month of the Trump administration.

During the first year of the Biden administration, that group gained 4.9 million jobs, another 25% clawback from the initial pandemic shock. The group remains about 3.1 million jobs short of February 2020 levels. Those who are not production or nonsupervisory workers have gained half a million jobs since then.

That means production and nonsupervisory workers have not reached pre-pandemic employment levels. Some of those workers have retired and will not rejoin the labor force, part of a longstanding trend toward an aging American workforce and overall declining labor force participation rates. Other workers have dropped out of the labor force because they are discouraged and have given up trying to finding a job. And still others are missing work as they deal with lingering effects from COVID-19 infection.

Work is often about more than income — it is about self-worth and life stability. As Princeton University economists Anne Case and Angus Deaton write in their 2020 book, “Deaths of Despair and the Future of Capitalism,” jobs are “not just the source of money; they are the basis for the rituals, customs, and routines of working-class life. Destroy work and, in the end, working-class life cannot survive. It is the loss of meaning, of dignity, of pride, and of self-respect that comes with the loss of marriage and of community that brings on despair, not just or even primarily the loss of money.”

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