Monday, August 31, 2015

Comparing labor market recoveries

 - New Deal democrat

With few exceptions, people don't get a job for social reasons.  They go to work each day in order to earn money to purchase necessities, discretionary goods, and to save for future needs.  In short, they work because of cold, hard cash.

So why is it that most economic writers appear to think the defining element of a labor market recovery after a recession is the number of jobs created? Isn't the better measure the amount of cold, hard cash it is delivering to workers?  That, dear reader, is measured by real aggregate wages, and that, I believe, is the best measure of labor market recoveries.

Let me give you a few examples.

First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour.  If we were to count by job creation, the second economy would be better.  But that's clearly  not the case.  The second economy is paying out only half of the cold hard cash to workers as the first.

Next, let's compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour.  Clearly the second economy is better.  It is paying workers 20% more than the first.

Finally, let's compare two economies that create 1 million 40 hour a week jobs at $10/hour.  In the first economy, there are 3% annual raises, but inflation is rising 4%.  In the second, there are 2% annual raises, but inflation is rising 1%.  Again, even though the second economy is giving less raises, it is the better one -- those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.

In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy  that pays more in real wages to its workers,  In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages.

So let's compare the increase in real aggregate wages -- the total wages paid to all nonsupervisory workers, adjusted for inflation, from their bottom in each recession.  Since that was 5 years and 9 months ago for our current recovery, that will be our measuring stick.  This is calculated as follows: average hourly earnings for nonsupervisory workers, times average hours worked, times the number of jobs, and then divided by the consumer price index, with the result indexed to 100 at the bottom.  Here are the results:

Trough Peak #months Real wage
growth %
 Wage growth
per month %
Wage growth
at 69 months
1/64*  8/6967* 30.2 .45  30.0%
11/705/7430   18.5 .62 11.8%***
4/753/79 47 20.8 .4411.5%*** 
7/801/81 62.4 .40  9.3%***
11/8210/8983 21.6  .26  18.4% 
2/9211/00  10533.8 .32  21.7%
4/03 9/07 53 10.5 .208.0% 
10/097/15**   69** 16.3 .2416.3%

*start of series

**to date

***Measured through the next recession, as recovery was short-lived

The interactive FRED graph of real aggregate wages can be found here.

An interesting aside is that the "Reagan recovery" of the 1980s is either great or mediocre depending on where you measure.  In the first 14 months, real aggregate wages grew 7.9%, or a blistering .56%  a month! In the last 69  months, however,  they grew only 9.3%, or a miserable .13% a month.  Had I measured back from the end rather than forward from the beginning, the current labor market recovery would be stronger.

 We can immediately see the effect of labor bargaining power, as all of the economic expansions before the 1980s showed far faster real aggregate wage growth per month than any expansion since.   On a per-month basis, the current labor market recovery is only better than the George W. Bush recovery.  Over the total recovery, the current recovery is only better than the George W. Bush recovery, and the 6 month recovery at the end of Jimmy Carter's term.

But because it is longer lasting, however,  after 69 months the current labor market recovery  has a better record than the short-lived recoveries of the 1970s and the brief 1981 recovery as well.   By this  measure it only  lags the 1990s recovery as well as the 1960s, and, depending on whether you measure forward from the beginning  or back from the end of the 1980s recovery, the current recovery is slightly worse, or significantly better than that labor market recovery.  Should the current recovery last another 24 months, it will probably surpass the Reagan recovery by either measure.

The bottom line is that the record  of this labor market recovery is mixed: poor monthly growth due to nonexistent labor bargaining power; but good total growth based on its persistence.