13 Dec. 2012 | Comments (2)
Government measures show that wage growth is at an historic low and it is still not recovering (See the chart below that shows the Employment Cost Index and Current Employment Statistics measures). When I present these figures to human capital professionals, I often hear that these rates seem too low compared with the annual raises that they see in their companies or from their competitors. In addition, they tell me that raises are now higher than they were during the recession. Why is there a mismatch between government measures and human capital professionals’ observations?
First, human capital professionals are correct in their observation that raises today are actually higher than government measures indicate, and are higher than they were during the recession. Government measures are not inaccurate; however they measure something different than raises for existing workers. The government tries to measure the average wage of the workforce, which includes both existing workers and new hires, but employers are much more likely to make negative adjustments to pay for new hires than for existing workers. During a period of high unemployment, new hires who were unemployed typically earn less than they did in their previous jobs. In addition, new entrants to the labor force during periods of high unemployment typically earn less than new entrants during expansion times. As a result, once new hires are included in the calculation, the growth rate of average wages is lower than HR professionals believe.
Another reason why government measures of wage growth seem low relative to human capital professionals’ expectations is that the composition of the workforce changes during recessions and expansions. During recessions, low-paid workers are more likely to be laid off than high-paid workers, and during expansions low paid workers are more likely to be added to the workforce. Since, during expansions, new hires earn less than existing workers, the addition of the new hires lowers the average wage of the workforce. That partly offsets the trend of faster wage growth for existing workers, which is the measure that many human capital professionals pay attention to. The Employment Cost Index (red line below) partly takes into account changes in occupational and industry mix, and as a result is more accurate than the average hourly earnings indicated by the Current Employment Statistics (blue line). During the recession, the Current Employment Statistics measure kept showing strong wage growth through the beginning of 2009, even though the wage growth for existing workers at the time plummeted.
It is typical that three or four years after a recession government measures still do not show wage recovery. Considering that, currently, unemployment still very high and corporate profits have recently stopped growing, I do not expect to see a recovery in wages any time soon. However, human capital professionals are correct when they note that average raises are higher than they were several years prior, and higher than government measures of wage growth.