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Are You Sure We're Not There Yet?
In recent macroblog posts, our colleagues Dave Altig and John Robertson have posed the questions Getting There? and Are We There Yet?, respectively. "There" in these posts refers to "full employment." Dave and John conclude that while we may be getting there, we're not there yet.
Not everyone agrees with that assessment, of course. Among the recent evidence some observers cite in defense of an approaching full-employment and growing wage pressures is the following chart. It shows a rather strong correlation between survey data from the National Federation of Independent Business (NFIB) on the proportion of firms planning to raise worker compensation over the next three months and lagged wage and salary growth (see the chart). (This recent post from the Dismal Scientist blog and this short article from the Dallas Fed also discuss this assessment.)
OK, no people brave enough to weigh in on this issue are actually saying they know for certain where the line is that separates rising wage pressures from just more of the same. But if you are looking for a sign of impending wage pressure, the chart above certainly looks compelling. Well, except that a pretty large gap has opened up between the behavior of the NFIB survey data and the actual growth trend in compensation since 2011. We'll have more on that in a moment.
The Federal Reserve Bank of Atlanta also conducts a survey of businesses, and among the things we occasionally ask our panel is how much they expect to adjust their compensation of workers (including benefits) in the year ahead. But our survey data aren't showing the same rise in compensation expectations that we see in the NFIB survey data (see the tables).
Of the 210 business respondents who answered the compensation question in our August survey, 81 percent expect to increase compensation over the next 12 months, compared with 4 percent who expect to reduce compensation for the next 12 months. In other words, on net, 77 percent of the businesses in our panel expect to raise compensation during the next 12 months. This share is a shade less than the proportion of firms that expected to increase compensation in May 2013.
Our survey data are not directly comparable to the NFIB since the NFIB survey asks firms about their plans during the next three months, and we ask about plans during the coming 12 months. Moreover, the NFIB surveys small businesses—roughly 75 percent of the businesses in the NFIB survey employ fewer than 20 workers, and about 60 percent employ fewer than 10.
So we cut our survey to isolate the smaller firms. The first observation we note is that as the size of the firm shrinks, so does the proportion of small firms planning to increase wages. This result isn't especially surprising since the small firms in our panel report considerably worse prevailing business conditions than do the large firms. But more to the point, we still fail to pick up a rise in expected wage pressure. On net in August, 53 percent of the firms in our panel that employ fewer than 20 workers expect to raise worker compensation during the next 12 months. That percent is down from 69 percent of similarly sized firms in May 2013.
Further, the average amount that firms expect to increase wages (2.7 percent) is also about unchanged from 15 months ago (2.8 percent), and this result is rather consistent by firm size and industry. If anything, our panel of businesses reports less expected compensation pressure in the year ahead than when we last asked them in May 2013. So no matter how we cut our panel data, we have trouble confirming the story that firms are anticipating significantly more wage pressure today than a year or so ago.
But maybe this is missing the big point of the figure that kicked off this post. Since about 2011, there appears to be a growing discrepancy between the recent trend in the NFIB survey on compensation increases and actual compensation increases. One could interpret that observation in two very different ways. The first is that the growing gap between the NFIB survey data and actual wage growth suggests pressure on compensation that will soon break loose. Perhaps. But another interpretation is that the relationship between the NFIB survey and actual wage increases has broken down recently. Correlation is different than causation, and many correlations coming from the labor market in recent years appear to be deviating from their historical norms. Isn't that the takeaway of the two earlier macroblog posts?
We're not brave enough to say that we know for certain that the economy isn't on the verge of an accelerated pace of compensation growth. But, if we were brave enough, we'd say our survey data indicate that such acceleration is unlikely.
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