Are Wages Flat or Falling? Decomposing Recent Changes in the Average Wage Provides an Answer

By Elvery, Joel; Vecchio, Christopher | Economic Trends, March 27, 2015 | Go to article overview

Are Wages Flat or Falling? Decomposing Recent Changes in the Average Wage Provides an Answer


Elvery, Joel, Vecchio, Christopher, Economic Trends


There recently has been a lot of concern about stagnant wages. Most of the discussion has focused on the median and average hourly wage, but these measures are sensitive to changes in the mix of occupations. For example, consider how average wages move during recessions. Demand for labor falls during recessions, and increased competition for the remaining jobs can push wages down. However, average wages often rise during recessions as firms lay off their less- skilled (and lower paid) employees while retaining their higher-skilled (and better paid) employees. In addition, over time there has been a steady up-skilling of the workforce, which has pushed the average wage higher. This article answers the question: What fraction of recent changes in the average wage is due to changes in the occupation mix versus changes in wages within occupations?

To answer questions like this, economists often use the Oaxaca-Blinder decomposition technique (Oaxaca is pronounced wa-haka). This technique is frequently used to analyze wage differences between two groups, for example men and women. We use it to decompose the change in wages between years into two parts. One part is the change in the average wage due to within-occupation wage changes (as in the increased-competition scenario above), and the other is the change in the average wage due to changes in each occupation's share of employment (like the up-skilling scenario above). We do the decomposition for the United States, the four states in the Fourth District (Kentucky, Ohio, Pennsylvania, West Virginia), and the Cincinnati, Cleveland, Columbus, and Pittsburgh metropolitan areas.

We use data from the Bureau of Labor Statistics' Occupational Employment Statistics (OES), a survey of 1.2 million establishments over three years, which provides annual estimates of employment levels and average wages for detailed occupations. Because of the overlap in the sample across years, we focus on just three years: 2007, 2010, and 2013. The 2007 to 2010 period captures the recession plus the first year of the recovery and the 2010 to 2013 period captures the rest of the recovery. The occupation codes used by OES changed between 2007 and 2010, so we combined some occupations to create time-stable occupation codes, giving us 785 detailed occupations. We adjust all wages to 2013 dollars to make it easier to compare values across time. For brevity, we call the "real average hourly wage" simply the "average wage."

We use the OES rather than the most common source of overall average wages, Current Employment Statistics (CES), because the CES lacks the occupational detail we need for the decomposition. But in the areas where they overlap, the two data sets give similar results. OES's estimate of the national average hourly wage in May 2013 is $22.81, $1.60 less than the CES estimate.

This may be because the OES can underestimate the average wage of occupations with very high wages. The OES also shows less growth in average wages from 2011 to 2013, which is consistent with the evidence that recent wage growth has been stronger in high-wage occupations. That said, the OES and CES have similar wage trends from 2007 to 2013. Over this time, the average wage increased 1.7 percent in the OES and 1.9 percent in the CES.

Our analysis shows that for the United States as a whole, the average wage rose 1.5 percent from 2007 to 2013, which is Slightly below the published OES estimate. If the mix of occupations were held fixed, the average wage would have declined 0.6 percent due to declines in within-occupation wages. If instead hourly wages within each occupation were held fixed, the average wage would have increased 2.1 percent due to increases in the share of employment in higher- wage occupations.

Looking at the states in the Fourth District over the same time period, we find that wages declined 0.6 percent in Ohio and rose 3.3 percent in Pennsylvania and West Virginia and 0. …

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