Wages are growing nowhere

Average wage growth, (AHETPI), YOY by year, in percent, 2002 to 2012

The chart above shows year on year percentage change of the average hourly earnings of production and nonsupervisory employees (i.e., non management staff, AHETPI, black line), measured monthly. I’ve modelled this across the last two US recessions and some observations are immediately apparent. First, considering what economists call the “early 2000′s recession” that ended in November 2001 we can see that wage growth still slowed as The US economy entered recovery, hitting a low of 1.8% in March 2004. By Q2 2006 growth wage had exceeded 4% with an average of 3.1%. until the nation entered recession. Its worth mentioning that US unemployment during the early 2000′s recession hit a high of 6.3%, and the sharp increase in wage growth is consistent with employers competing for labour i.e., by increasing pay.

Next we consider The Great Recession, which started in December 2007 and ended in June 2009 with unemployment hitting a peak of 10% during this period. Since that recession’s end wage growth has continued to slow to 1.3% in November 2012. The average growth in wages since The Great Recession ended was has been 2.1%. The table below presents average wage growth annually starting in 2010, and clearly the series is trending down.

Average wage growth, YOY by year, in percent, 2010 to 2012

Average wage growth, YOY by year, in percent, 2010 to 2012

Why is wage growth so important? The US economy is heavily dependent upon consumer spending, so clearly as wage growth slows so will the economy. While some argue wage growth is less important these days due to deflationary pressures, it is unlikely those on the receiving end of consistently smaller pay increases are appeased by such arguments. Finally, considering the high unemployment rate observed during The Great Recession it is unlikely we’ll see a large increase in wage growth in the near term.

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