Our common wage measure increased markedly in Q3 (consistent with the increase observed in all measures) and returned to levels that are similar to the pre-Great Recession period. While some measures (notably the AHE and the ECI) are currently distorted by within sector shifts, wage growth remains solid despite relatively low levels of employment.
We take this evidence as consistent with the narrative of continuing scarcity of labor supply putting upward pressure on wages, especially in some sectors. Nevertheless, we continue to believe and estimate that at the current aggregate level of wage growth the resulting upward pressure on consumers’ prices remains tiny (if any).
Figure 1 Common Factor across measures of wages and total compensation
Note: the Figure shows four measures of wages and total compensation, as well as the estimated common factor from our Dynamic Factor Model. ECI stands for “Employment Cost Index, Total Compensation, Private Industry, All Workers, SA”. AHE stands for “Average Hourly Earnings, All Employees, Total Private, SA”. CPH stands for “Nonfarm Business, Hourly Compensation, SA”. AFWT stands for “Atlanta Fed Measure of Median Nominal Wage Growth, Unweighted Overall, 3 Month Moving Average”. The four measures of wages and total compensation are shown at quarterly frequency in YoY growth rates. The common factor is specified as an autoregressive process of order 4 and it is projected on the ECI (the measure with the lowest standard deviation). By construction, the absolute level of the estimated common factor cannot be interpreted because the four series are demeaned at the beginning of estimation given their different means. Instead, the level of the common factor can be compared to its own history.