On-the-Record Press Call by Chairman of the Council of Economic Advisers Kevin Hassett on the CEA Report: "How Much Are Workers Getting Paid? A Primer on Wage Measurement"

Via Teleconference

10:36 A.M. EDT

MR. FETALVO: Great. Good morning, everyone. Thank you for joining today's call. Today we are joined by Kevin Hassett, Chairman of the Council of Economic Advisers. A question-and -answer portion will follow opening remarks, so please keep your questions related to this topic. The entire call will be on the record, embargoed until the conclusion of this call.

And with that, I'll turn it over to Chairman Hassett.

CHAIRMAN HASSETT: Thanks so much, and thanks all of you for calling in. You know, measuring wages is a really complicated question. And with a strong economy, many in the economics profession and in the media have been puzzling over traditional wage measures that we use, and asking the legitimate question: How can we not have wage growth in such a tight labor market with such high economic growth?

So we wrote this paper to investigate that question. That's really the role of the CEA: to look at emerging issues in the economy, with an emphasis on data and measurement.

Much of the commentary about wage growth that we see is influenced by confusion we find about proper measurement. The headlines have missed the real wage growth because they measure inflation with the CPI, which has long been known to exaggerate inflation, and therefore exaggerate the rate at which wages have to grow in order to maintain a worker's purchasing power.

So what makes up the level of wages? What do workers get to take home? And what part of their compensation is on the benefits side that may not be obvious to them?

Well, first, cash earnings do not include fringe benefits available in most jobs, which is what employers provide their employees, such as paid leave, bonuses, health insurance, life and disability insurance, retirement plans, and legally required benefits.

Bonuses and paid leave are the ones growing fastest lately. Employees appreciate such benefits just as much as cash, and that's why we look at the sum, rather than one in isolation.

The usual measures of wages neither subtract the payroll and income taxes owed as a consequence of working, nor do they add tax credits, like the earned income tax credit that supplements wages. Also, inflation can eat away at wages, which is also not taking into account the usual government data.

Thus, this traditional measurement approach misses an important part of the economic value of work to the worker and (inaudible) for her family.

In addition, it's important to decompose the workforce -- look at the changes and the makeup of those who are working. In other words, every year, young, inexperienced people enter the workforce, and thereby are included for the first time in the national average at wages which are below those of more experienced workers. And at the same time, some of the most experienced and highly paid workers retire, and they're no longer included in the national averages.

As a result, when you have more high-wage workers like baby boomers retiring, while younger or less-experienced workers come into the labor force, then the national average wage can go down.

So we went through the data, and we did the arithmetic. Once accounting for benefits and decomposition, we find that wage gains are 10 to over 20 times more than the headline measures, although 10 to 20 times is kind of an exaggerated way to say it, because you're starting with a really, really low number. You know, we find that real wages are increasing after tax by 1.4 percent over the past year, and that's the real increase.

Workers are getting bonuses. These aren't anecdotes, but they're also showing up in national surveys. These gains are real. So that means that the 1.4 percent above inflation is -- you could add 2 percent if you want to know what the nominal number is.

Now, it's also true that there are other places in the profession where people have tried to account for some of these factors, and we discussed some of those in the paper, and showed that our adjustments are not out of line with some of the adjustments that others have come up with.

These compensation gains represent substantially more money for American workers. For the average American household, a 1.4 percent increase in their income means over $1,000 more, per year, of income growth.

Another way that employers are competing for workers is offering more paid leave and maternity and personal days, et cetera. And productivity growth makes this real wage growth possible and sustainable without inflation. Household incomes have increased even more because a greater fraction of the population now has jobs.

So last year, during the tax reform debate, we estimated that -- from the corporate side, that the tax bill would lead to higher wages for workers as companies invested in their people.

We believe then, as we do now, that these full wage effects depend on capital formation, which will take three to five years to reach what economists call the "steady state," maybe longer. And we're really at the five-month date for that data. And for households, the pace of growth we see could represent about $2,000 in household income gains over two years from the strong economy and TCJA, and that would be $4,000 over four years if it continues. And so it looks like the wage data are kind of on track with what we expected.

And so, finally, I'd just like to summarize it again, and maybe perhaps make it a little more intuitive, that the headline numbers that showed that there is not much wage growth, which we've seen a lot of discussion about, that they don't include benefits; they don't include bonuses; their buy is down because new entrants had low wages; and they don't account for the tax cuts that just happened.

And, in addition, there were some numbers that you've seen in some of the articles about this -- use the Consumer Price Index, instead of a more realistic measure of inflation to adjust. We find that when we account for all those things, which we do in gory detail in the paper, that real wage growth right now is running at about 1.4 percent.

And at the final point, there's a little bit of discussion of this in the paper that this 1.4 percent doesn't include the rate of return on age and experience, which we estimate would add another 2 percent to that. And so, if you'd like, what we're doing in order to adjust for compensation is looking at the same demographic person in 2017 and in 2018, and then estimating the wage growth for that demographic class over that time period, and then averaging all of those numbers.

And so, therefore, the fact that a typical person over the year would see some return on age and experience as well, and we've excluded that. And so if we put the age and experience number in, we get an even higher number.

And with that, I thank you all for listening to my presentation, and will now open it up for questions.

Q: Hi, thanks for doing this. I just wanted to ask you -- it looks like that your measure still shows, by your measure, wage growth was a bit -- was faster in 2015, 2016 and has come down a bit. I mean, isn't -- don't we have still a little bit of a mystery in that the unemployment rate is lower than it was back then and wage growth is slower?

So is there -- I mean, do you see any room still for, sort of, questions about why we're not seeing -- I mean, your measure still doesn't show an acceleration. And so does that still leave some puzzle here in terms of how wages are responding to the low unemployment rate?

CHAIRMAN HASSETT: Yeah, hey. Thanks for the question. And, you know, I think that as you mentioned, that this adjustment isn't just for this year. If you go back and look, for example, during the stimulus, there was no wage growth.

I think that the basic point of accelerating wages that we get from the capital forms is a three-to-five-year thing that we expected it would take about that time, going all the way back to last year, in part because productivity needs to go up in order to support higher wages, and that increase in productivity comes from capital formations that takes a little bit of time, and also, in part, for two other reasons: One is that people don't tend to have their salary reset every month, but it tends to happen once a year. And finally, to the extent that the after-tax measure is one that we should focus on, which we argue that it is, then to the extent that withholding underestimates the tax savings from the tax bill because things like child credits and so on tend to not be included in the withholding changes fully accurately, then that could understate the current measure as well.

So we would definitely answer your question -- suggest: Expect that the current number will accelerate over the second part of this year because the cap ends, even as we measure it better going into next year because we have the capital formation and the increase in productivity and the tax stuff getting right.

You know, we think that the difference between pre-tax and post-tax income should grow by about 2 percent, a little bit less. And right now, we're seeing less growth than that, which suggests that the full tax bill effect isn't in the data yet.

So with that, we can go to the next question.

Q: Hey, thanks for doing this. I guess I had two questions. The first is, in your kind of new measurement, you're including bonuses, but I know that a lot of the bonuses that were given out right after the tax cut, and sort of trumpeted by the White House, were one-time bonuses. And so I'm wondering if there's any risk that there's sort of an artificial bubble in your measure that won't be replicated in future years because you won't have a new tax bill legislation each year.

And then secondly, and I think more importantly, I guess, if wages are really growing faster, wouldn't that be an argument for the Fed to keep raising interest rates, or even a hike at a more aggressive pace? Some of the reluctance on the Fed's part seems to be them agreeing that wage growth has been fairly tame during this expansion. Thanks.

SENIOR ADMINISTRATION OFFICIAL: Yeah, thanks a lot for those questions. The first one, for bonuses, going all the way back to when I was in grad school -- which was actually like a really long time ago now -- that one of things that was a stylized fact that every labor economist accepted was that nominal wages were very rigid. And our expectation is that even the bonuses that were announced as one time will have an impact on nominal wages next year because employers will be reluctant to give people pay cuts, especially in a tight labor market because that might affect retention.

And you're right that a lot of the bonus increases were announced as one-time things that were not specifically necessarily said we're never going to this again, but that they didn't adjust the wages. They made it a bonus. But our expectation is that we won't see, for example, a big decline in wages next year because there are no bonuses there. We expect it to affect the level as well.

And part of the reason why is that we think that higher wage growth tends to follow productivity, and we're starting to see productivity increases that are significant compared to what we saw in, say, 2015 and 2016.

Finally, with respect to the Fed, we respect their independence and wouldn't advise them on monetary policy. And so I'm sure that they have their own opinions about what real wage growth means for monetary policy, but I wouldn't want to step in front of that.

Q: Kevin, do you have any figures on the long-term trends here? In other words, the 1.4 percent might simply be idiosyncratic to this particular year. And more important are the long-term trends.

CHAIRMAN HASSETT: Thank you. And you wrote a really interesting piece that factored into our thinking on this just a couple weeks ago.

The long-term trends data, we've made some charts on that. And we are focusing very much in this paper on detailed measurement issues that, again, if you look at the -- gosh, how many pages is it -- 30-ish pages, that we are very much into decomposing the current numbers and thinking about them since the President took office.

And one of the things that we've noticed as we've talked about our work with other people is there's been some demand for long-term trends. And so we've made some long-term trend charts which -- I'm looking at DJ Nordquist, who everybody on the call knows, but I think DJ tells me that we're about to tweet some of those charts so that people can look at the long-term trends that aren't -- some things that aren't in the paper.

But yeah, so we do have some long-term trend calculations, which we're going to make public shortly after the call.

Q: Hi, Kevin. Thank you for doing this. Two-fold question please. The metrics that you put out, have they in any way been suppressed, potentially not going higher because of the tariff back-and-forth that's been going on between the administration and nations all over the world?

And secondly, a much broader question if you could indulge us at all: Today is the deadline for the public comment period. Should we expect the President to engage in further tariffs against China? Thank you.

CHAIRMAN HASSETT: Yeah, the President's actions towards China, I'll refer you to the Press Office.

And as for tariffs, going back to the key link that we've emphasized all the way back to last year and into this year -- between capital spending and productivity, and then productivity and wages -- you know, that's the channel that economists think that you can drive wages up.

We've seen capital spending virtually explode this year, over the first half of the year; it's up by about 10 percent. And so, basically, normal economist math that you'd learn in first year of graduate school would say that that's going to track through to productivity and then into wages.

I think that when I was doing back-of-the-envelope calculations, mapping the caps changes to capital spending last fall during the tax debate, then I think the last number that I ended up coming up with our team on user cost effects on investment was that we'd get about an 11 percent increase in capital spending this year. And so we're really right on track for what we'd expect to see with capital trending up because of the tax effect.

And since the number is pretty much what we thought would happen because of the tax effect, then other factors like the ones you mentioned don't really seem feasible in the paper to us at this time.

Q: Hi, Kevin. Thanks so much for doing this. Two questions. First, do you really think that American workers appreciate non-cash benefits just as much as cash? And if so, I mean, are you guys basically arguing that an effect of the current economy is just -- it's squeezing more an increased share of benefits to workers into non-pay compensation?

And I guess, if that's true, why would that be? What's going on in the economy that companies are less willing to just pay people more money and more willing to give them things like paid leave?

CHAIRMAN HASSETT: So, yeah, hey. Thanks. So if you look, we've got Figure 2 in the paper actually shows what's been happening to that over time. And it's the trends that really goes back for quite a long time that there's an increase in benefits as a share of total compensation.

And you know, I don't think -- you know, if I run the ocular regression back to '04, it looks like we're pretty much on trend -- the trends itself for that period. So I don't think

that there's something really new going on in terms of people preferring benefits.

But, yeah -- I mean, I do; I don't know, maybe you don't. But if you were to take away the benefits that I received at work, then it would significantly affect my utility. I guess it's possible that it's a little bit less of a sense that the old thing about economists is that lump sum is better that in-kind. And so if I have to get life insurance with my employment, then maybe I'd rather have the money and then I could buy my own life insurance. So there might be a little bit of wiggle room there.

But I think that ignoring benefits, especially given all the advances in healthcare and so on, seems like that's got to be the wrong answer.

You know, I guess, if philosophically I could imagine that dollar for dollar might be a bigger adjustment, then I believe it's true for me. And but we didn't make an attempt to go into that direction in the paper.

Q: Hey, Kevin. Thanks for doing this. Looks like an interesting paper. I haven't had the chance to dive in yet. But, a quick question: There's a bunch of other metrics out there from various government agencies. As you know, ECI and real compensation per hour in the productivity data. There's real earnings data. I could keep going. I guess there's personal income after taxes from BEA. Have you had a chance to line up your findings with any of these others? And is there support for what you've found in some of these other metrics?

And the second question I have is, there's been a lot of talk for a long time about this idea of trying to tease out the demographic shifts from the wage data. Maybe if it doesn't get too wonky, a quick primer on how you did that and what that specifically found, and how much of your findings that represented?

CHAIRMAN HASSETT: Yeah, Steve, thanks. And I know that -- not to attack anyone else on the call, but this is -- you know this data about as well as anybody. And so, yeah, if you dig into the paper on page 5, we have like a whole bunch of data for all the different measures. And on page 22, we show what the decomposition looks like. And so we think that adding benefits adds about two-tenths to the wage number, and controlling for demographic composition is about three-tenths. And so that's what those adjustments look like.

And again, for the demographic composition change -- and if I describe it inaccurately, then the staff that's in the room with me will shake their heads and I'll put you on mute and then I'll try again. But it's just what I said earlier on the call, that we're looking at -- you know, take a demographic group, then what we're doing is we're looking at how their wage has changed over the period, and then we average those changes across demographic groups in order to get the final number. And so it's an average of holding demographics constant -- wage changes. And so that's the way we do the demographic adjustment.

And, you know, there's been some discussion in the literature that that's a reasonable way to do it. And in the paper we talk about that approach and getting (inaudible).

Q: Hey, thanks for doing this. A group of Democratic lawmakers this morning put out a report on the "Future of Work, Wages, and Labor." And their contention is that wages are being held down because all the powers with corporations and with the current government and siding with corporations, and that labor -- (inaudible) wages are so low is that labor no longer -- and (inaudible) in part because the decision is made by the Republicans in office.

I want to get your response to whether they aren't (inaudible) their terms of being -- that's why wages are down because they just don't have any power anymore?

CHAIRMAN HASSETT: Yeah, thanks. I have not read their report, and look forward to what their analysis is. You know, our report shows that real wages right now are growing, and that the sort of wage puzzle is less of a puzzle than you might have believed if you just looked at the topline number where you're doing average hourly earnings; where the composition changes are important; where you don't include benefits and you don't account for tax cuts.

And if you look at that number, then it looks like there's no wage growth but seems really inconsistent with the national income (inaudible), and the fact that GDP is growing so well.

You know, our job at CEA is to be transparent, to do data analysis that is replicable, and to help people think about the plusses and minuses of different measures. You know, I think that if we accomplished anything with this paper, it might be to help you as journalists know what to look for and, like, what's a reasonable measure and what's not. And I'll raise you to look at that paper. But I would hypothesize that they used the very misleading statistics that we just discussed that don't account for the things that we think that any reasonable measure should account for.

And I just want to emphasize -- it goes back to something Steve sort of asked in the previous question -- that this is government data that we're using, and we think that we have a better way to account for some really important things that one needs to account for. This is in no way a criticism of the BLS or the people who calculate government data. It's really just meant to help people who wonder about what's going on in the economy, especially at the time of tax cuts, to measure it correctly.

And so, if you measure it correctly, there's real wage growth, which means that there's a lot less of a puzzle, and so therefore the reach for explanations, like (inaudible) power and so on, maybe seems like the less attractive call. But I have to hold off commenting specifically on what they put out until I have a chance to look at it.

Q: Hi, yeah, thanks again. I just wanted to ask -- this is following up on some of the other questions, about how this compares historically. I'm looking through the paper -- I didn't get a chance to, sort of, thoroughly read it -- but I see on page 11 there's a chart that sort of shows how this was added to wage growth over the years. And I'm just wondering if you could comment on the fact that it doesn't really look like there is a significant difference this year than there has been over previous years. Or are there other statistics about how this approach would, sort of, look at what wage growth has been under previous administrations in recent years? So can you comment on that, please?

CHAIRMAN HASSETT: Oh, sure. Yeah, thanks. And Figure 3 on page 11 is what happens if you add benefits. And so -- and then we have other adjustments later on. And as I promised to (inaudible), we'll maybe put some longer -- long-run trends, things out there.

And I think that acceleration of wage growth that will happen once the capital spending is fully in train, the productivity growth is fully in train, is starting to be apparent in the productivity data; is definitely apparent in the capital stock data. And the wage growth, at the end, is not radically higher than we had in 2015.

And we expect that the wages -- as people get their annual increases and as the capital stock goes online -- will accelerate from here. But that's something we'll have to wait and see what the data say in the second half of the year.

Q: Hi, there. So, Dr. Hassett, would this influence the labor share of income, which has also declined substantially over the past many years? Would your recalculations of wage growth impact that measure meaningfully?

CHAIRMAN HASSETT: Thanks for that question. And I would like to follow up with you on that, because I was involved with Thomas Piketty in a public debate before I came into the White House, and Alan Auerbach and I had a paper in the American Economic Review where we looked at this sort of path of the labor and capital shares over time.

And Piketty's data on capital share increase -- and Matt Rognlie had a Brookings paper on this too -- was basically dominated by the increase in the return on housing. And since housing -- a lot of workers don't own houses, the housing return is kind of not -- it's capital returns, but it's maybe not in the Marxian view of the war between capital and labor, what people mean when they think of like the dark satanic mills that Marx envisioned.

And so, anyway, so if you controlled for housing, then the increase in the capital share went away. And so one of the things that -- as I was preparing for this call and re-reading the materials last night and this morning, one of the things that I decided I really wanted to follow up on with the staff is what -- the latest on what we think this means for the labor share. But I have yet to ask them the question.

The good news is we have a staff meeting in about 10 minutes, and so some poor soul is going to help us both with this, and I'd appreciate it if you could shoot DJ an email, and then we'll get you some info on that. But I'm very interested in that question as well, but it's not in the paper, but it's a really good follow-up question.

END 11:02 A.M. EDT