Posted on August 6, 2021
The Bureau of Labor Statistics (BLS) released its monthly employment report today, showing strong gains in economywide jobs in July, not surprising to us given the continued strength in tax withholding that we track on a daily basis. Total wage and salary payments as measured by the employment report, which most closely relates to tax withholding, also improved in July. Over the past two years (so July 2021 versus July 2019), wages and salaries for private-sector workers as measured in the establishment employment report (from a large sample of firms) were up by 7.4 percent, a continued and substantial improvement since the worst of the economic downturn last spring, but well below the two-year growth of around 10 percent or more pre-pandemic (see chart below). By that BLS measure, the economy still has a ways to go before wage growth is back to pre-pandemic amounts. (We look at two-year growth because one-year growth measures are relative to the depressed amounts of a year ago, currently showing very high rates of growth that are harder to interpret in isolation.)
Alternatively, the measure of economywide two-year wage growth from the Bureau of Economic Analysis (BEA), as part of the National Income and Product Accounts, is showing stronger amounts that are getting back closer to pre-pandemic levels. That is probably a better measure of economywide wage growth because the underlying data come from most all employers, rather than coming from a sample as in the BLS monthly employment report. Furthermore, tax withholding data, which over a long period of time correlate well with those other direct measures of wage growth, are showing more growth than both of the direct wage measures, to above pre-pandemic amounts. We believe that part of the withholding growth stems from an increase in the average tax rate on wages, which in turn has resulted from wages becoming more skewed to higher-wage workers (see previous post). But overall wages are probably rising faster than in the BLS employment report, and we suspect even faster than in the BEA reports, which are subject to potentially substantial revisions.
Looking just at today’s employment report, not surprisingly employment remained down (by 2.8 percent) in July compared to amounts from two years ago. The wage gains relative to pre-pandemic amounts are coming from increases in average hourly earnings and the average work week among those people working (see table below). Average hourly earnings tend to move up over time with inflation and productivity gains, but movements in average hourly earnings are harder to interpret now. In particular, the decomposition of total wage growth into its three components–hourly earnings, employment, and hours worked per week–is presumably still being affected by a change in the mix of jobs. With lower-paying jobs down by the most, that skews the averages. It was most apparent at the worst of the downturn last April, when average hourly earnings jumped up while the number of jobs dropped precipitously; but the effect presumably remains to a smaller degree. Nonetheless, the picture is a bit complicated, as two-year average hourly earning growth has remained pretty stable over the past year while employment has continued to improve. That may be a sign that workers have been able to command higher wages given the dynamics of today’s labor force and the well documented labor shortages in certain occupations and among different types of workers.
