Friday, July 31, 2015

The Q2 stall in labor costs and part-time employment

 - by New Deal democrat

The employment cost index (ECI), a median measure of employee compensation, pretty much laid an egg in the second quarter, and actually decreased slightly when deflated by personal consumption expenditures.

It is instructive to compare this with several other measures of employee compensation, first of all, another median measure of usual weekly earnings for full time employees (red):

Note that even with the 2Q small decline, the wage trend as measured by the ECI has been improving, whereas usual weekly earnings have been generally flat perhaps with slight improvement over the last several years.

Why the difference?  Most likely in the differing ways the two measures treat part time employment.  Here is a good explanation from Moody's:
There are several measures of wages and compensation, but one of the most closely watched is the employment cost index. This measure is important because it attempts to control for differences in job mix that can affect wage growth and therefore capture inflation in the true underlying cost of labor.... 
The ECI controls for job mix by measuring average compensation within specific groups of workers within the same firm... including ... part- or full-time status ....  For example, if a firm interviewed for the ECI has one worker who is a part-time nonunion cashier and another who is a full-time unionized cashier, they would not be grouped together. 
As a result, when firms increase [decrease] their share of part-time workers to save on compensation costs, it will not show up as a decline [increase] in the ECI. This is potentially problematic, as early in the recession there was a significant rise in part-time workers, and during the recovery this has fallen.
Now let's take a look at the number of workers who usually work full time (blue) vs. part time (red) over the last year:

After a year of improvement, full time employment stalled in the second quarter while part time employment grew.  It is likely that increases in hours (and so pay) explains the relative improvement in the ECI through the first quarter, and its stall in the second quarter, whereas full time employees have seen little increase in real compensation over that time period.
Another way to look at this is real aggregate compensation, which has risen stoutly during most of this expansion, but has stalled this year:

Aside from paltry nominal wage increases and the mix of part-time vs. full-time workers, the second quarter stall is probably due in part to gas prices which rose into June this year, but peaked in April last year, and part to housing costs which have in significant part been driven by foreign, especially Chinese, cash buyers (which may abruptly end now!).