Martha Gimbel and Cecilia Elena Rouse

“ Usually when we see rising wages, the economy is growing. So how is it that April 2020 – the month when the U.S. economy lost 21 million jobs – saw some of the fastest wage growth in recent memory? And if wage growth slows in the coming months, or even goes into negative territory, what would that tell us about the economic recovery? We explain in this blog why we believe that two measurement issues—composition of the labor force and base effects—explain these trends and why average wage data will be easy to misinterpret in the coming months. ”

“ If we return to Workers A, B, and C, let’s assume that Worker A is now hired back. The average wage would drop back down to $30 per hour. Year-over-year, that is a 25% decline in the average wage from the $40 per hour when Worker A did not have a job. But that large decline is due entirely to the firing and re-hiring of Worker A, which creates a combination of base effects and composition effects that decreases wage growth. ”

“ When changes in data are driven by a shift in underlying characteristics—like fewer low-wage workers remaining in the workforce—economists call these ⁠.
A simple example can be helpful. Consider a job market with three earners: Worker A makes $10 per hour; Worker B makes $20 per hour; and Worker C makes $60 per hour. The average hourly wage in this illustrative job market is $30. But suppose Worker A gets laid off. Now the average hourly wage, comprised of just Workers B and C is $40. The average rose $10, not because of wage growth but because the composition of the workforce changed. ”