Today, the Council of Economic Advisers (CEA) released a report outlining the limitations of traditional wage measures and how they understate compensation growth among American workers. Below is the executive summary. Read the full report here.
A primary way that economic policies affect American families is through the wages they receive in the labor market. However, despite the importance of wages for evaluating economic performance, there are a number of limitations in the traditional measures-especially during periods when the labor force is growing and new workers are entering the workforce. This report outlines four such concerns about traditional wage measures and their effects on observed compensation growth.
First, many of the official wage statistics fail to incorporate additional employment benefits such as bonus pay, health insurance, and contributions to retirement savings. These additional benefits have made up an increasing share of compensation in recent years, so the growth in total compensation has been greater than that seen for cash wages alone. Ignoring bonus pay and other benefits is particularly misleading during the past year when over six million workers have benefitted from the tax cuts in the form of pay raises, better benefits, and bigger bonuses. Second, because those entering the workforce for the first time or after a period of not working generally have less work experience than those who have been continuously employed, these new workers also often have lower wages. As a result, when tracking the average wage of those working at a given point in time, these new workers will create the appearance of lower wage growth than workers are actually experiencing. Third, when measuring real wages, it is necessary to properly measure inflation in the economy. When using the Personal Consumption Expenditure Price Index (PCEPI)-which is preferred by many economists, including those at the Federal Reserve-we observe faster real wage growth than when using the commonly reported Consumer Price Index for Urban Consumers. Fourth and finally, as a result of personal income tax cuts resulting from the Tax Cuts and Jobs Act of 2017, real after-tax income has been rising faster than pre-tax income. These lower personal income taxes are also not captured in official wage statistics.
Once these adjustments have been incorporated to better reflect the actual experiences of workers, real compensation growth over the past year has been substantially higher than that observed in headline wage measures. Over the past year (2017:Q2-2018:Q2), real average hourly after-tax compensation has risen by 1.4 percent, well above the near-zero real wage change suggested by headline measures. An alternative to CEA's approach is to take the Atlanta Federal Reserve's Wage Growth Tracker nominal cash wage growth, adjust for taxes and fringe benefits, and deflate with the PCEPI, in which case real after-tax compensation growth is 1.9 percent over the same period.