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How Aggregation Matters for Measured Wage Growth

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  • Michael Morris
  • Robert W. Rich
  • Joseph Tracy

Abstract

Wage growth is often measured by the change in average hourly earnings (AHE), a gauge of overall wages that aggregates information on earnings and hours worked across individuals. A close look at this aggregation method demonstrates that AHE growth reflects disproportionately the profile of high-earning workers who typically display lower and less cyclically sensitive wage growth. Using data from the Current Population Survey (CPS), we adopt a different aggregation method and compute wage growth as the average of individuals’ wage growth. The analysis indicates that the CPS measure of average wage growth is significantly higher than AHE growth and that it displays a more meaningful nonlinear relationship with the Congressional Budget Office’s unemployment gap. Last, our findings do not support the claim that there was hidden slack in the labor market during the recent expansion that was restraining wage growth.

Suggested Citation

  • Michael Morris & Robert W. Rich & Joseph Tracy, 2020. "How Aggregation Matters for Measured Wage Growth," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2020(19), pages 1-9, July.
  • Handle: RePEc:fip:fedcec:88344
    DOI: 10.26509/frbc-ec-202019
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    References listed on IDEAS

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    1. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
    2. Kumar, Anil & M. Orrenius, Pia, 2016. "A closer look at the Phillips curve using state-level data," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 84-102.
    3. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-689, August.
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    Cited by:

    1. Jimeno, Juan F. & García Pérez, J. Ignacio & Carrasco, Raquel, 2020. "Worker flows and wage dynamics: estimating wage growth without composition effects," UC3M Working papers. Economics 31567, Universidad Carlos III de Madrid. Departamento de Economía.

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    Keywords

    labor market slack; wages;

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