Competing Narratives on Real Wages

Considering that it is an election year, it is perhaps unsurprising that there are two competing narratives on the current state of real (i.e., inflation-adjusted) wages. Democrats point out that, even after adjusting for inflation, wages are now higher than they were prior to the pandemic. Republicans, in contrast, note that real wages have declined since Biden took office. The fact checkers say both sides are technically correct: whether real wages are higher or lower today depends on one’s choice of the start date for the analysis.

At first glance, the fact checkers appear to be correct. As shown in Figure 1, real average hourly earnings can be calculated by dividing average hourly earnings by the Consumer Price Index and then multiplying the series by 100. By this measure, real average hourly earnings grew at an annualized rate of 0.4 percent from January 2020 to June 2024 (as indicated by the blue dashed line). They grew at an annualized rate of -0.6 percent from January 2021 to June 2024 (as indicated by the red dashed line).

A closer look, however, suggests otherwise. The problem isn’t so much with the fact checkers. Rather, it is with the data, which should be adjusted for composition effects. After adjusting real average hourly earnings for the changing composition of employment, it no longer matters whether one chooses a start date of January 2020 or January 2021: real average hourly earnings are higher today. But they aren’t much higher. Real average hourly earnings have grown slower in the post-pandemic period—and, under the Biden administration — than they did in the immediate pre-pandemic period.

Composition Effects
The Bureau of Labor Statistics reports the average hourly earnings of all private employees in the United States. In calculating this average, they do not include the hourly earnings of unemployed persons or those outside the labor force. Since the composition of employed persons might change over time, the average hourly earnings series should be adjusted for composition effects.

To see the potential problem, consider the average weight of people on an elevator. Suppose initially the elevator holds a woman (115 lbs), her baby (25 lbs), and two adult men (165 lbs and 205 lbs). The average weight of people on the elevator is (115+25+165+205)/4 = 127.5 lbs. Next, suppose the woman and her baby exit the elevator on the second floor. Now, the average weight of people on the elevator is (165+205)/2 = 185 lbs. Of course, no one’s weight has increased between the first and second floor. Rather, the composition of the elevator has changed. The woman and her baby were initially included in the average, but were then omitted after they exited on the second floor.

Something similar happened with the real average hourly earnings series. As shown in Figure 1, real average hourly earnings increased from $34.02 in January 2020 to $35.97 in May 2020. Did the average American get a raise in early 2020? No. Rather, many Americans lost their jobs in this period, as the economy came to a screeching halt. And, since those exiting employment were more likely to earn less than $34.02 per hour than more than that, the average hourly earnings among those remaining employed increased.

One simple way to adjust the real average weekly earnings series for composition effects is to include one’s weekly earnings in the calculation of the average regardless of whether he or she is employed, with the assumption that anyone who is not employed has hourly earnings equal to $0. The real average hourly earnings of the US population — everyone, not just those employed — is equal to the average hourly earnings of those employed, multiplied by the number of employed persons, and then divided by the population.

Using employment and population data from the Federal Reserve Economic Data website, the adjusted series is constructed and presented here:

Analyzing Adjusted Real Average Hourly Earnings
How have the real average hourly earnings of all persons in the US changed since January 2020? The adjusted series shows a substantial decline in real average hourly earnings in early 2020, from $16.27 in January to $14.57 in April. This should not come as a surprise, since many people were out of work — and, hence, not earning anything — at the time. Real average hourly earnings have improved in the time since, rising to $16.57 in June 2024.

Notably, the real average hourly earnings of all persons in the US are higher today ($16.57) than they were on either January 2020 ($16.27), just prior to the pandemic, or in January 2021 ($15.93), when President Biden took office. But they are not much higher. Real average hourly earnings of all persons in the US grew at an annualized rate of just 0.4 percent from January 2020 to June 2024. For comparison, they grew at an annualized rate of 1.9 percent from June 2014 to January 2020.

Competing Narratives
Democrats want to take credit for the higher real wages. Republicans want to deny that real wages are higher. Both are obscuring the facts.

Real wages are a bit higher today. But they are not as high as pre-pandemic real wage growth would have predicted. It would be difficult to conclude, therefore, that the Biden administration has been a boon to American workers. But it would also be wrong to conclude that workers are worse off than they were just before President Biden took office.

Since Democrats are unlikely to tout tepid real wage growth and Republicans are unlikely to acknowledge any progress on real wages whatsoever, the two competing narratives will likely persist. Reasonable people should reject both narratives, in favor of the facts. Politics is not a suitable substitute for reality.

This article originally was published by the American Institute for Economic Research.