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As Republicans tout the supposedly booming economy, progressives have spent most of the summer marshaling a counternarrative of Trump-era wage stagnation.
David Leonhardt of the New York Times made the case in early August that when you compare the middling growth of nominal hourly pay to the rising price of the things people buy, “you get a stagnation in real wages. Welcome to the Trump wage slump.” Vox’s Emily Stewart, citing a somewhat different data series, wrote in late July that inflation-adjusted wages might actually be falling.
This week, the White House, in a somewhat unusual gesture of normalcy, is out with a new report from the Council of Economic Advisers pushing back on the wage stagnation thesis. CEA argues that the vision of stagnant pay is based, fundamentally, on looking at the wrong data sources. It doesn’t include the value of fringe benefits like health care, pensions, or paid leave. It uses an inflation index that overstates the extent of price increases. It doesn’t correct for the changing demographic mix of the population. And last but by no means least, it doesn’t account for the rise in take-home pay that’s associated with the tax cuts.
Releasing a calm, well-supported policy brief with lots of footnotes and no invective is pretty out of character for the Trump administration. It’s also pretty persuasive.
The White House’s case that pay is rising
The CEA’s argument is summarized in this table, arguing that depending on how you look at it, real average hourly after-tax compensation grew either 1.4 percent or 1.9 percent over the past year.
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To explain what this chart says, it has two columns that start with different ways of measuring average pay. One, the CES series, comes from basically surveying people about what they get paid and then taking the average. The other, from the Atlanta Fed, tries to track individual specific people across time. Atlanta Fed shows systematically higher wage growth than CES because the average pay level across the economy is dragged down by formerly unemployed people finding work — when you’re unemployed, CES simply throws you out of the sample rather than marking you down as earning $0 per hour.
The White House then adds in non-cash benefits that people make at work, and adjusts the CES for the changing demographic mix of the workforce — we have a higher share of 20-something workers today than we did in the recent past, and young people always earn less than older workers — and then subtracts 2.2 percent for inflation. Then it adds in the value of the tax cuts, and reaches the conclusion that pay has risen either 1.4 percent (using CES methods) or 1.9 percent (using Atlanta Fed methods).
The contrary view is that you should stick with CES, not count non-wage benefits, not adjust for demographics, not consider the tax cuts (which, after all, aren’t wages), and use a different method of measuring inflation that shows more rapid price growth. On that view, real pay rose only a minuscule 0.1 percent over the past year.
There are cases to be made for and against all these different adjustments, but surveys of how people feel about the economy make it pretty clear that the White House’s approach gives a better picture of Americans’ economic well-being.
The best case for Trump: surging consumer confidence
You can quibble with some of the White House’s methodological ideas here, and certainly people who don’t like the Trump administration are motivated to do so. But if you ignore the ins and outs of wage data controversies, surveys of Americans consumers show a high and rising level of confidence that’s simply very difficult to square with a story in which their incomes are not rising.
The University of Michigan’s consumer confidence survey, for example, shows the sentiment continuing its steady ascent and now back up to around its Bush-era peak, though still somewhat below its dot-com-era heyday.
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A slightly different consumer sentiment from the Conference Board has confidence at its highest levels in the 21st century, while Bloomberg’s Consumer Comfort Index is somewhere between the two.
If Trump critics are right and wage growth has been flat over the past year, then we have essentially two wage puzzles to answer. One is why employers haven’t been forced to hand over more loot, given the low unemployment rate; the other is why households are feeling more confident about their financial situation given the lack of increased pay. The White House’s answer — that actually pay has gone up — not only has a reasonable basis in statistics but conveniently answers both puzzles.
What’s less persuasive is the broader political arguments they want to make about this.
Wage growth isn’t zero, but it’s still pretty low
On a conference call with journalists tied to the release of the report, CEA Chair Kevin Hassett sought to go beyond the four corners of the statistical argument and make a broader case that trendy inquiries into whether increased economic concentration or declining union power help explain sluggish wage growth. Those arguments may be wrong, but Hassett’s statistics don’t really debunk them.
All of that, CEA Chair Hassett says on a call, suggests that the "wage puzzle" (why has unemployment hit rock bottom while wages have stayed low) is less puzzling than economists have believed. Pooh-poohs increasingly popular explanations like monopsony and worker leverage.
— Lydia DePillis (@lydiadepillis) September 5, 2018
The main issue is that of the four adjustments the CEA wants to make, one of them has nothing to do with wages and two others have been consistently present across time. Using a different inflation index and including benefits in your calculations makes wage growth look more robust this year, but it also makes it look more robust in virtually all past years as well, so it doesn’t do anything to rebut concerns about why wages are slowing down.
Similarly, the observation that households have extra cash in their pockets because of tax cuts is true, but a tax cut and a raise are not the same thing, and they send a different message about the wider story of the economy.
In other words, the economic situation this summer is pretty clearly better than a simplistic look at the official inflation-adjusted wage series would suggest. Americans’ economic fortunes are getting better, not worse, as reflected in the polls and in more sophisticated reads of the wage data. But it’s still true that wage growth remains slower than it has historically been during periods of low unemployment, and it’s reasonable for people to wonder why that is and what can be done to fix it.
