Critics of the Trump administration have spent the past few months jabbing at its claims of a monster success with the economy simply by pointing out that wage growth seems to be going sideways, and economist Aaron Sojourner of the University of Minnesota has joined in.
The administration insists wages are increasing. Sojourner and many others, meanwhile, seem pretty sure that if so, the growth rate rounds to zero — although that’s not even close to the best point he makes about this whole debate.
Sojourner has been back at the university’s Carlson School of Management for a while after working in Washington for an academic year as part of the Council of Economic Advisers, overlapping with both the Obama and Trump administrations.
He’s posting on social media now, he said, because he’s been immersed in the recent data about work and wages, a rare advantage for a professor.
Sojourner’s an economist, not a sharp-elbowed pundit, and while he clearly leans left he’s a relatively gentle poster on Twitter. With the notable exception of a video of a chicken driving a car (not really enough space to explain that one), his posts are likely to include graphs of common economic data, maybe from the St. Louis Fed’s economics database.
It’s not easy to work up much interest in the arguments of wonks, but, on the other hand, slow wage growth continues to be puzzling, particularly so far into a long economic expansion.
After all, employers complain all the time about how hard it is find workers. The unemployment rate has declined more or less steadily for nearly nine years now and is now as low as it’s been since the dot-com boom. Yet it’s really hard for a lot of Americans to get a meaningful raise, at least one that exceeds the price increases for the things they need to buy.
There are explanations for slow average wage growth that you might expect, from the impact of global competition on the thinking of cost-conscious U.S. managers to how automation has eliminated lots of relatively well-paid “middle skill” jobs.
But whatever the cause, slow wage growth was one of the main justifications for cutting corporate taxes last year, according to proponents in the Trump administration. Business tax cuts would, hopefully, lead to sustained wage growth, although it seems far less well understood that they may not have meant wage growth right away.
To get a handle on what Sojourner and other economists are talking about, it’s probably best to start with the wage numbers reported by the U.S. Bureau of Labor Statistics, the agency that among other things produces the closely watched monthly jobs report that always makes the news.
Real average hourly earnings, meaning wages adjusted for inflation, in August for all employees increased 0.1 percent from July, the BLS said this month. So that’s better than going backward.
However, for the more than 80 percent of workers lumped into the category of production and nonsupervisory employees, there was an increase in average hourly earnings in August that was offset exactly by how much prices increased. So on average most workers were running in place.
And for ordinary workers over the last year, real average hourly earnings actually decreased 0.1 percent. The numbers comparing this past July to the same month a year earlier showed a bigger decrease in inflation-adjusted hourly wages.
Never mind these BLS numbers, the White House Council of Economic Advisers suggested in a report this month, because they don’t paint a complete enough picture.
In this view, the conventional numbers miss things like the growing value to workers of non-wage compensation, like retirement plan contributions and health insurance, and they use the wrong measure of inflation to judge the purchasing power of wages.
The CEA report also argued that it’s fair to take into account the increases in take-home pay due to the tax cut passed at the end of last year. Altogether the annualized after-tax compensation growth, taking inflation into account, is at least 1 percent, and that rises to 1.4 percent after adjusting take-home pay for the 2017 tax cut.
The thing that seems to clearly lie out of bounds in this report is the tax cut argument, because that’s not the way that economists usually keep track of inflation-adjusted wage growth. As for the rest of these points, well, maybe well-intentioned economists can’t all agree on them.
“There’s three or four different measures of wage growth. There’s three or four different measures of price inflation,” Sojourner said, adding that he thinks the consumer price index for urban consumers seems to capture pretty well changes in the prices of what American households really need.
“So there’s four times four different combinations you could choose, and you can rationalize it any number of ways, but the fact is that all give you answers that are in a pretty narrow range,” he added. “No matter what measure you use, real wage growth is low, like close to zero, and lower than it was a couple of years ago. Those things aren’t in dispute.”
Meanwhile, there’s also no dispute that corporate profits are soaring, up more than 16 percent in the second quarter, according to the Commerce Department. The big reason, of course, is the 2017 tax law, which cut corporate taxes by about one third in the quarter compared to the prior year.
No need to bother choosing between the CPI or the Federal Reserve’s favorite price inflation indicator to see that there’s been a big jump in inflation-adjusted profits going to the owners of U.S. corporations.
“Look at what’s happening. The issue is not negative 0.2 percent or positive 0.2 percent in real wage growth. The policy effects are not there,” Sojourner said. “The policy effects are … the corporate profits.”
With this observation, Sojourner’s pointing to a better question to ask than whether or how much real wages are growing: With workers maybe inching ahead or maybe not, and corporate profits surging, aren’t there better economic policy issues to argue about?