Wage Measures Send Mixed Signals

By Jeffrey Sparshott 

        The latest wage data were disappointing for American workers. But several other measures of earnings are sending much more upbeat signals, creating a confusing picture at a crucial moment for the U.S. economy.
        Determining the real trend for U.S. workers' wages would help the Federal Reserve understand how quickly the labor market is tightening, a key focus of policy makers as they weigh raising interest rates for the first time since 2006.
        Average hourly earnings, the best-known measure of workers' pay, were $24.95 in June, up a scant 2% over the past year, the Labor Department said in the latest employment report released Thursday. That was softer than the 2.3% gain the prior two months but matches the overall pace for the recovery.
        At first glance, that suggests the labor market isn't tight enough to generate big pay gains despite a drop in unemployment to a seven-year low.
        But economists generally prefer a different measure of wages known as the employment cost index, or ECI. Unlike average hourly earnings, the ECI controls for compositional shifts in the labor force, allowing fairly clean historical comparisons. Average hourly earnings can rise simply because more high-paid workers were hired, not because pay raises picked up.
        In the most recent data available, the employment cost index showed labor costs rose 2.6% in the first quarter, accelerating from 2.2% growth in the third and fourth quarters. Because the ECI adjusts for changes in the workforce, the more robust figure could suggest broad-based wage gains for workers.
        Yet a third measure of wages is called employer costs for employee compensation, or ECEC. The ECEC and ECI are based on the same survey, and both measure wages and benefits. But unlike the ECI, the ECEC doesn't adjust for the labor-force composition. So a surge in a high-paid category can skew it. Thus, ECEC captures labor costs at a particular moment but isn't meant to be used to compare different time periods.
        This measure is sending by far the most upbeat message: Employer costs for employee compensation jumped 4.9% from a year earlier in the first quarter, the second consecutive increase at that relatively robust level. ECEC may be growing faster than ECI because of compositional shifts in the workforce, suggesting high-earning workers are doing particularly well.
        "I wouldn't probably want to look at just one," said Josh Bivens, research and policy director at the Economic Policy Institute, a left-leaning think tank. "They're all telling you a little bit of something about the labor market."
        So which is telling the real story?
        Omair Sharif, a strategist at SG Americas Securities, said the true picture is probably somewhere between the lackluster 2% reading from hourly earnings and the more robust 2.6% for the ECI. The hourly measure may have been distorted by a statistical quirk related to when the Labor Department measured earnings, and the ECI appears to have been inflated by bonus payments.
        "It's probably not as strong as the ECI and not as weak as 2%," Mr. Sharif said. "But it will be a real struggle to get to 3% by the end of the year. I'd be thrilled if we get to 2.7%."
        The Atlanta Fed, however, suggests the economy may already be there. It draws from Census Bureau data to look at workers who haven't changed jobs to produce its wage-growth tracker, which now says median wages were up 3.3% in May from a year earlier, the strongest showing in six years.
        Taken together, the data sets suggest the moribund hourly earnings data aren't the full story: The labor market may be getting a little tighter.
        That seemed to be what Fed officials think.
        "It is encouraging that we are seeing tentative indications of an acceleration in labor compensation," Fed Vice Chairman Stanley Fischer said last week before the latest hourly wage data was available.
        That could boost confidence among Fed officials, who are looking for progress in the labor market and signs of inflation. Their first move, lifting rates from near zero, could come as early as September.
        Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com
        (END) Dow Jones Newswires

        July 05, 2015 17:49 ET (21:49 GMT)

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