Real wages rose during the recession, fell during the recovery, say Cleveland Fed researchers
They examine the US as a whole, as well as four states (KY, OH, PA, and WV) and four metro areas (Cincinnati, Cleveland, Columbus, and Pittsburgh) within the Fourth Federal Reserve District
Discussion about stagnant wages has focused primarily on the median and average hourly wage. But these measures are sensitive to changes in the mix of occupations, say Federal Reserve Bank of Cleveland researchers Joel Elvery and Christopher Vecchio. After decomposing changes in average wages into two parts – changes to wages within occupations and changes to wages due to changes in each occupation’s share of employment – the researchers find that the real average hourly wage rose 3.7 percent in the US from 2007 to 2010 and fell 2.2 percent from 2010 to 2013. They also note that the drop in wages would have been more severe had there not also been an increase in the share of employment in occupations with above-average wages. The researchers say this was true for the US as a whole and for the four states (Kentucky, Ohio, Pennsylvania, and West Virginia) and four metropolitan areas (Cincinnati, Cleveland, Columbus, and Pittsburgh) that they looked at.
According to Elvery and Vecchio, the increase in the average wage in the US during the recession came from an increase in the share of employment in higher-wage occupations as well as rising wages within occupations. In the recovery, there was a 2.5 percent decline in the average wage due to within-occupation wage changes, and shifts in the occupational mix had a small positive effect (0.3 percent). This implies that, on average, people who did not change occupations experienced declines in their real hourly wage between 2010 and 2013.
The researchers say the rise in wages during the recession and fall during the recovery may be due to so-called “selection effects.” They explain that, during recessions, firms tend to retain their most productive workers, both across and within occupations. Furthermore, less productive firms are more likely to lay off workers during recessions, which would also increase average productivity within occupations. Wages are closely linked to productivity, so the selection effects that increase within-occupation productivity also increase within-occupation wages. As hiring increases during a recovery, people who were laid off during the recession – who tend to have lower productivity than people in the same occupation who remained employed – find new jobs, which would pull down the average productivity (and wages) of the workers within an occupation.
Elvery and Vecchio say it is also possible that wages declined more in the recovery than in the recession due to what economists call “sticky wages.” While firms generally do not cut the wages of existing employees, when the labor market is weak firms can reduce the wages offered to new hires. As a result, the wages of new hires are more responsive to current labor market conditions than are the wages of existing employees. This implies that within-occupation wages would not change much during the recession due to low levels of hiring, but they could decline as firms hire new workers during the recovery. In this scenario, the within-occupation wage declines indicate just how weak the labor market was between 2010 and 2013.
Read: Are Wages Flat or Falling? Decomposing Recent Changes in the Average Wage Provides an Answer
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479