Has wage growth been slower than normal in the current business cycle?
You may have read in the popular press that wage growth seems much slower since the Great Recession compared with previous business cycles. Let’s see what FRED data can tell us. The graph above shows wage growth, defined as the annualized percentage change in the average hourly earnings of private production and nonsupervisory employees. To interpret the graph, note the gray bars, which indicate recessions since 1976, and the green vertical lines, which indicate the peaks of each business cycle. A generally U-shaped pattern occurs between the starts of consecutive recessions. At the start of a recession, the rate of wage growth falls for a number of months, then the trend is reversed as wages increase until the next recession, and the cycle repeats.
To better compare how wages behave across business cycles, we graph the wage behavior observed for each of the prior three business cycles and the current business cycle together. Each cycle is centered at zero, which denotes the month with the lowest wage growth for each business cycle. The current business cycle is identified by the purple line. This cycle started at a lower level of wage increases than the prior three cycles. More importantly, the wage increase from the low point has been following a lower trend: In prior cycles, wage increases exceeded 4%; the current cycle’s wage increases still have yet to reach 3%.
In a future blog post, we’ll look into possible reasons why the current business cycle’s wages have been increasing much more slowly.
How these graphs were created (plus some background): For the first graph, search for wages and select “Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private.” From the “Edit Graph” panel, change the units to “Percent Change from a Year Ago.” The business cycles can be accented by adding green lines to the graph corresponding to each peak using the “Create user-defined line” option under the “Add Line” tab. For the second graph, change the units to “Index” and enter the date “1986-12-01.” This was the lowest point in wage growth for the associated business cycle, which had begun 65 months earlier and would last 43 months longer. To capture the entire business cycle with monthly data, check the “Display integer periods…” box and set the range from -65 to 43. If the units under the “Customize data” tab are changed to “Percent Change from a Year Ago,” the resulting graph shows the section of the first graph from July 1981 to July 1990. While this same result could have been achieved more easily by changing the date range of the original graph, an advantage of this approach is that it allows the same series to be plotted from multiple separate date ranges. Use the “Add Line” tab to add this same series to the graph four times. The options for each line will be the same as those for the first line, except that the custom index date and length of the date range will be different: A second low point occurred in September of 1992, 26 months into a cycle that would last 102 months longer, and the next in January 2004, 35 months into a cycle that would last 46 months longer. The present cycle had its low point 58 months in, during October 2004, and the end date of the cycle has yet to be determined. One way to resolve this problem is to set an unnecessarily high integer end date, like 200. FRED will then automatically fill in the latest available data.
Suggested by Ryan Mather and Don Schlagenhauf.
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