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January 16, 2020
Do Higher Wages Mean Higher Standards of Living?
Editor's note: We have updated macroblog's location on our website, although archival posts will remain at their original location. Readers who use RSS should update their feed's URL to https://www.frbatlanta.org/rss/macroblog.aspx. Also, we are implementing a new commenting system for posts. In the comments section at the end of this post, you'll be able to create an account to leave comments.
A recent macroblog post used Atlanta Fed Wage Growth Tracker data to observe that the hourly wage of the lowest-paid workers has rebounded in recent years after declining for a decade. The chart below depicts this finding, showing the median hourly wage of the lowest-paid 25 percent of workers in the Tracker sample relative to the median for all workers.
Moreover, the post showed that this recovery was not just a story about states and localities increasing their minimum wages. It also appears that there has been a significant tightening in the labor market for unskilled or low-skilled jobs.
Taken at face value, this is good news for workers employed in low-wage jobs. But here's the rub: the median wage in the first quartile is still low—$11.50 in 2019, or 55 percent of the overall median wage. Moreover, these are hourly wages before taxes and transfers (we'll get back to this shortly). They don't represent what is happening to these workers' ability to make ends meet, which depends crucially on income after taxes and transfers.
For households at the bottom of the income distribution, means-tested transfers can play an especially important role. Means-tested transfers—cash payments and in-kind benefits from federal, state, and local governments designed to assist individuals and families with low incomes and few assets to meet their basic living needs—represent about 70 percent of income before taxes and transfers for households in the bottom quintile of the income distribution, according to a recent report by the Congressional Budget Office. However, the size of the transfers tends to decrease as earnings increase, and they stop altogether when a worker exceeds income- and asset-eligibility thresholds.
The interaction between changes in earnings and various means-tested public assistance programs is an important public policy issue, and it is one that staff at the Atlanta Fed are studying. In a March 2019 macroblog post, David Altig and Laurence Kotlikoff reported that this interaction results in low-income households facing a higher median effective marginal tax rate than high-income households. For low-income households with children, this effect can be especially severe because the presence of children increases the value of programs such as the Supplemental Nutrition Assistance Program (or SNAP, formerly known as the food stamp program) and the likelihood of enrollment in additional programs such as federally subsidized child care. (You can read further research on the effective or implicit marginal tax rates of low-income households at Congressional Budget Office (2016), Romich and Hill (2018), and Chien and Macartney (2019).)
To illustrate the point, the Atlanta Fed team studied the case of a hypothetical single mother with two young children who works in a near-minimum-wage, full-time job and whose basic living expenses are helped by various transfer programs. One avenue to improving her family's standard of living is if she were to return to school and pursue a higher-paying career as a nurse. Over the long term, the net gains from education and career advancement are unambiguous. However, the Atlanta Fed's analysis shows that as long as her children still require care, the reduction in payments from various benefit programs could partially or even completely offset the gains. Look for an Atlanta Fed paper discussing this very real dilemma coming soon on the Bank's Economic Mobility and Resilience webpage.
What do findings like this mean for interpreting the Wage Growth Tracker's evidence that people in the bottom part of the wage distribution are experiencing relatively larger wage gains? Perhaps there is a bit less to celebrate than meets the eye. Around 46 percent of these individuals are in households with children. To the extent that they also participate in means-tested public assistance programs, the relative increase in their family's standard of living could be much less than the size of their pay raise would suggest.
December 16, 2019
Faster Wage Growth for the Lowest-Paid Workers
On November 25, Fed chair Jay Powell gave a speech titled "Building on the Gains from the Long Expansion," in which he observed that
Recent years' data paint a hopeful picture of more people in their prime years in the workforce and wages rising for low- and middle-income workers.
In making this point, Chair Powell used a cut of the Atlanta Fed's Wage Growth Tracker that looks at the median annual wage growth of workers in the lowest 25 percent of the wage distribution. As the following chart shows, the lowest-paid workers have been experiencing higher median wage growth (the blue line) in the last few years than workers overall (the green line). This reverses the pattern seen in the wake of the Great Recession, when median wage growth for lower-paid workers slowed by more than for workers overall.
The faster median wage growth for lower-wage workers shown in chart above has also translated into an increase in the relative median wage level of these workers. To see this, the following chart shows the median wage level for those in the lowest wage quartile relative to the median for all workers in the Wage Growth Tracker dataset.
The chart shows that for workers in lower-wage jobs, their relative median wage over the 2000s has deteriorated, and that erosion has reversed course only in the last few years. This reversal may reflect increasing tightness of the labor market for lower-wage jobs relative to other jobs over the last few years. The challenge of filling jobs requiring few skills is something we have been hearing about a lot recently from the businesses we talk to (for example, see here), and this sort of challenge could be behind higher wages for those workers. However, several state and local governments have increased the minimum wage in recent years, which would also push up the relative pay for those in the lowest-paid jobs.
Are the observations in the previous chart solely attributable to minimum wage increases? To get some idea, the next chart contrasts the relative median wage in states that increased their minimum wage at some point between 2014 and 2019 to those that did not. The blue line is the relative median wage of the lowest quartile in the 28 states that increased their minimum wage (23 states introduced new minimum wage levels, and five implemented increases legislated before 2014), and the green line is relative median wage for the states that did not increase their minimum wage.
We would expect to see a rise in the relative median wage in the states that raised their minimum wage, and indeed we do. For the group of states that increased minimum wages (the blue line), the relative median wage is now closer to that of states that did not increase their minimum wage (the green line). Interestingly, though, even in the "no increase" states, the relative median wage has improved, suggesting that the increased tightness of labor markets, or some other factor than hikes in state minimum wages, is playing a role in pushing up the pay for those in lower-wage jobs. Consistent with the message of Chair Powell's speech, the good news is that there is scope to continue to build on the gains from the long and ongoing expansion for workers at the bottom end of the wage distribution.
November 25, 2019
Is Job Switching on the Decline?
Here's a puzzle. Unemployment is at a historically low level, yet nominal wage growth is not even back to prerecession levels (see, for example, the Atlanta Fed's own Wage Growth Tracker). Why is wage growth not higher if the labor market is so tight? A recent article in the Wall Street Journal posited that the low rate of job-market churn likely explains slow wage growth. Switching jobs is typically lucrative because it tends to be going to a job that better uses the person's skills and hence offers higher pay. Job switchers can also help improve the bargaining position of job-stayers by inducing employers to pay more to retain them.
But is the job-switching rate really lower? A paper that Shigeru Fujita, Guiseppe Moscarini, and Fabien Postel-Vinay presented at the Atlanta Fed's 10th annual employment conference looked at a commonly used measure of employer-to-employer transitions. That measure, developed by Fed economists Bruce Fallick and Charles Fleischman in 2004, uses data from the Current Population Survey (CPS) on whether a person says that he or she has the same employer this month as last month. Job switchers are those reporting having a different employer. As the following chart shows, the Fallick and Fleischman data (the yellow line) support the Wall Street Journal story that the rate of job switching is much lower than it used to be.
Source Fujita et al. (2019)
However, Fujita and his coauthors discovered a potential problem with these data, noting that the CPS doesn't ask the same-employer question of all surveyed people who were employed in the prior month. Importantly, the incidence of missing answers has increased dramatically since the 2006, as the following chart shows.
Source Fujita et al. (2019)
If these missing answers were merely randomly distributed among job switchers and job stayers, then it wouldn't matter much for the Fallick-Fleischman measure. But Fujita et al. found that the missing answers were disproportionately from people who look more like job switchers in terms of observable characteristics such as age, marital status, education, industry, and occupation—making it likely that the Fallick-Fleischman measure undercounts job switchers.
The researchers developed a statistical adjustment to the Fallick-Fleischman measure to account for this bias (the blue line label our series in the following chart—this is the same as the first chart) that tells a somewhat different story than the original measure (yellow line).
Source Fujita et al. (2019)
In particular, the adjusted job-switching rate is only moderately lower than it was 20 years ago and has fully recovered from the decline experienced during the Great Recession. Although a decline in job switching might be a factor in the story behind low wage growth, based on this adjusted measure it doesn't seem like the dominant factor. The low wage growth puzzle remains a puzzle.
August 5, 2019
What the Wage Growth of Hourly Workers Is Telling Us
The Atlanta Fed's Wage Growth Tracker has shown an uptick during the past several months. The 12-month average reached 3.7 percent in June, up from 3.2 percent last year. But in 2016, it depicted acceleration that eventually reversed course. So is this recent increase real or illusory?
Although using a 12-month average quiets much of the noise in the monthly data, it is possible that the smoothed series still may exhibit some unwanted variation due to the way the Wage Growth Tracker is constructed. For example, how the monthly Current Population Survey reports individual earnings might be a factor introducing unwanted noise into the Tracker. Specifically, some people directly report their hourly rate of pay, and some report their earnings in terms of an amount per week, per month, or per year.
Relative to those paid an hourly rate, there are at least a couple of reasons why using the earnings of nonhourly workers might introduce additional variability into the Wage Growth Tracker's overall estimate of wage growth. First, reported nonhourly earnings include base pay as well as any overtime pay, tips, and commissions earned, and hence can vary over time even if the base rate of pay didn't change. For a worker paid at an hourly rate, reported earnings exclude overtime pay, tips, and commissions and so are not subject to this source of variation. Second, the method we use to convert nonhourly earnings to an hourly rate is likely subject to some margin of error since it involves using the person's recollection of how many hours they usually work. These two factors suggest that the earnings of workers paid at an hourly rate might be a somewhat cleaner measure of hourly earnings.
To investigate whether this distinction actually matters in practice, we created the following chart comparing the 12-month average Wage Growth Tracker since 2015 (depicted in the green line) with a version that uses only the earnings of those paid at an hourly rate (blue line).
As the chart shows, the 12-month average of median wage growth for hourly workers generally tracks the overall series—both series are about a percentage point higher than at the beginning of 2015. However, the hourly series is a bit less variable, making the recent uptick in wage growth more noticeable in the hourly series than in the overall series. This observation suggests that as we monitor shifts in wage pressure, the hourly series could complement the overall series nicely. Versions of the Wage Growth Tracker series for both hourly and nonhourly workers are now available on the Wage Growth Tracker page of the Atlanta Fed's website.
If you would like to use the Wage Growth Tracker's underlying microdata to create your own versions (or to conduct other analysis), follow this link to explore the data on the Atlanta Fed's website. See this macroblog post, "Making Analysis of the Current Population Survey Easier," from my colleague Ellyn Terry to learn more about using this dataset.
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