Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How the Wage-Price Gap Varies by Occupation Type
Transcript
- Lucas: So here's a number that jumped out at me this morning. Average hourly earnings for private workers hit thirty-seven dollars and forty cents in April, up from thirty-seven thirty-five. That's a year-over-year gain of about four and a half percent. Luna: Right, and that sounds like good news on its face. Wages are growing faster than inflation, which is running around three percent on core CPI. Lucas: Exactly. But if you look at the employment cost index — the ECI — wages and salaries rose just three point three percent over the same period. That's a full percentage point gap. Luna: Wait, so two different government surveys, both measuring wages, and they're telling different stories? How is that possible? Lucas: It's a classic case of composition effects. Average hourly earnings can go up not because people are getting raises, but because the mix of workers shifts. If low-wage workers get laid off and higher-wage workers stay, the average goes up even if nobody's pay changed. Luna: So the ECI is more like a 'same-job, same-person' measure? It holds the mix constant? Lucas: That's exactly right. The ECI tracks the cost of labor for a fixed basket of jobs. It's like the CPI for wages — it adjusts for composition. So when the ECI is growing slower than average hourly earnings, it suggests that the headline number is being flattered by a shift toward higher-paying occupations. Luna: Okay, but that still doesn't tell me who's actually getting raises. Is it the bartender or the accountant? Lucas: Great question. If we break it down by industry, the picture gets clearer. Leisure and hospitality — that's restaurants, hotels — saw wage growth of five point two percent year-over-year in the ECI. Professional and business services — office workers, consultants — got just three point one percent. Luna: So the bartender is actually getting a bigger raise than the accountant. That's kind of the opposite of the composition story. Lucas: It is. The composition effect is more about the middle of the market. Think about it: during the pandemic, a lot of low-wage service jobs disappeared. As they've come back, those workers are being rehired at higher starting wages. That pulls up the average hourly earnings number because the denominator is shifting. Luna: But the ECI, holding the job mix constant, shows that the workers who stayed in their jobs are seeing more moderate gains — except in the service sector where demand is still hot. Lucas: Exactly. And that's the real story. The wage growth we're seeing is concentrated in a few sectors. It's not broad-based. And that matters for the Fed. Luna: Speaking of the Fed — new Chair Kevin Warsh was sworn in on Friday. How does this wage data inform his first moves? Lucas: Warsh has been on the record saying he thinks the labor market is still too tight. But if the ECI is the metric he's watching, it's showing wage pressures are moderating. Three point three percent is well below the peak of five percent we saw in 2022. Luna: So maybe he doesn't need to jack up rates further. But consumer sentiment hit a record low in May, partly on Iran war fears and inflation worries. That could complicate things. Lucas: Right. Sentiment is terrible, but spending is still holding up. The Fed cares more about actual inflation than surveys. And the ten-year breakeven inflation rate is at two point four percent — that's anchored. So Warsh might feel comfortable holding steady. Luna: But let's get back to the composition effect. One thing that always bugs me: these surveys — average hourly earnings and the ECI — they're both based on payroll data. They don't capture gig workers, self-employed people, or anyone paid in cash. Lucas: That's a really important point. The Bureau of Labor Statistics estimates that about ten percent of workers are in alternative work arrangements. If those workers are seeing slower wage growth — or no growth — the official data might overstate how the typical worker is doing. Luna: And those workers are disproportionately low-income, people of color, women. So the gap between what the data says and what people feel might be even wider than the ECI suggests. Lucas: That's the kind of nuance that gets lost in the headlines. 'Wages up four and a half percent' sounds like a victory lap. But when you peel it back, the real story is about who's winning and who's still catching up. Luna: So what's the takeaway for our listeners? If you're in professional services, your raise might be three percent. If you're in hospitality, you might be getting five. But the average masks both. Lucas: Exactly. And if you're self-employed, you're not in the data at all. So when you hear 'wages are beating inflation,' ask: whose wages? Because the answer changes everything. Luna: I think that's a good place to leave it. Next time, maybe we'll dig into that consumer sentiment data and what it means for spending. Lucas: Sounds like a plan. Until then, keep an eye on the ECI — it's the quiet number that tells the real story.