Every month for the last year, the Bureau of Labor Statistics’ wage data releases have continued to demonstrate that workers simply aren’t getting ahead. Despite some nominal growth, real wage growth has been consistently hovering around zero (rising at just a 0.2 percent annual rate from 2016-2017).
At the same time, this year’s annual data release from the Census Bureau showed us that the median household income has risen to $61,370 in 2017, a 1.8 percent increase even after adjusting for inflation.
How are real incomes rising even as real wages are flat? The answer lies in the simple fact that both hours worked and employment have been rising consistently. Annual income depends not only on wages, but also on the number of hours a person works in a year and the share of the population that is working.
Figure 1 tracks these components of annual income over the last few years, scaling up the changes for 2018 to take into account the lack of data for September through December:
- In 2015 and 2016, low inflation contributed to strong real wage growth, which in turn supported household income growth.
- In 2017, and thus far in 2018, inflation has been higher, and while nominal wage growth picked up some, it has not increased enough to offset higher inflation. Thus, real wage growth has been close to zero, providing almost no boost to incomes.
- In 2018, increasing hours worked have been contributing to income growth.
- Throughout the 2015-2018 period, increasing employment as a share of the population has been supportive of income growth.
The rise in the employment rate is itself due to a set of underlying factors. First, the aging of the population—and increasing retirements—has put downward pressure on labor force participation. Second, an improving economy has meant that since about 2015, the labor force participation rate of prime-age workers has been increasing, and older workers are also staying in the labor force longer. Finally, a falling unemployment rate means that a higher share of those in the labor force have jobs.
Some of these factors can be predicted with a degree of certainty. In particular, the population will continue to age, and it is unlikely that the unemployment rate will continue to fall much below its current level of 3.9 percent. This means that, for rising employment to continue to support income growth, more of the people currently out of the labor force must enter the labor market. On that score, it is perhaps a worrying sign that prime-age participation has fallen below its recent February 2018 peak.