Earnings of Private Employees: A Big Recovery in January

Here is a look at two key numbers in last week's monthly employment report for December:

  • Average Hourly Earnings
  • Average Weekly Hours

The government has been tracking the data for Production and Nonsupervisory Employees for decades. But coverage of Total Private Employees only dates from March 2006.

Let's examine the broader series, which goes back far enough to show the trend since before the Great Recession. We want to look closely at a five-snapshot sequence.

First, here is a chart of the Average Hourly Earnings. We've included a linear regression through the data to highlight the trend. Hourly earnings increased at a faster pace through 2008, but the pace slowed from early 2009 onward. The December data point was a bit disturbing, a 5 cent month-over-month decline, the largest decline in the history of the series. However the January data point is a big bounce of 12 cents, the largest increase in the series.

But the hourly earnings above are nominal (not adjusted for inflation). Let's look at the same data adjusted for inflation using the Consumer Price Index. Since the government series above is seasonally adjusted, we've used the seasonally adjusted CPI, and we've chained the series to the dollar value of the latest month of hourly wages so that the numbers reflect the purchasing power in today's dollars. Since an official CPI for the most recent month hasn't been released, we've extrapolated that value from the percent change of the two previous months. As we see, the difference is amazing. The 12-cent monthly increase becomes a 24-cent increase. Why so? The extrapolation of the CPI reinforces the disinflationary trend of recent months, largely a result of plunging gasoline prices.

The decline in real wages at the onset of the recession accords with our expectations. But why the rise in the middle of the recession when the Financial Crisis began unfolding in earnest? Let's add another data series to the mix: Average Hours per Week. About eight months into the recession, hours per week began to fall. The number bottomed a few months before the recession ended and then began increasing a few months after it ended. The current 34.6 hours continues to hover at the highest since March 2008.

For a better understanding of the relationship between hourly earnings and the average work week, let's overlay the two. We see a striking inverse correlation during the Financial Crisis. And by the Fall of 2010, the two began to reverse their directions.

The next chart multiplies Real Average Hourly Earnings times the Average Hours Per Week for a snapshot of the trend in weekly wages. Real weekly earnings are up $7.34.

Finally, let's create a snapshot of hypothetical expected real annual earnings by multiplying the weekly earnings times 50 (yes, a couple of weeks of unpaid vacation).

The key word in the chart title is "hypothetical" because among the various factors not included in our calculation is the fact that the employed population is constantly changing, and the rate and types of change accelerate in proximity to recessions. Employees are terminated, shifted to part-time or replaced by part-time employees. During recoveries, new employees are added.

The Great Recession is now well behind us. But the last chart above offers a reminder of the sluggishness of the recovery at this point -- over five years after the recession ended. The post-recession real annual earnings initially peaked in September 2010, hit an interim low in August 2011 and a lower low in November 2012. It then slowly trended higher to a new post-recession high and has surged in recent months, in part because the disinflationary trend in the CPI.

In Summary…

  • Nominal average hourly earnings rose 12 cents from the previous month, more than erasing the December dip.
  • Real average hourly earnings are the highest in the history of this series (which dates from March 2006).
  • The average work week remained unchanged at 34.6 hours.
  • Hypothetical real weekly and annual earnings are at new highs.

For additional perspectives on earnings, see our commentaries on household income.