Usually Claudia Sahm is answering the hard questions in economics. She does it better than anyone else. But yesterday she asked a question, which automatically warrants some thinking.
Dr. Sahm pointed out the disconnect between total wage and salary income and payrolls. While it’s clear that transfer payments explain the higher levels of personal income during the COVID-19 recession, it’s less clear how total wages and salaries could have nearly returned to their pre-recession level with 10 million fewer jobs.
In November 2020, workers received wages and salaries equivalent to an annual rate of $9.6 trillion, an increase of two percent from November 2019. Yet over the same period, the total number of jobs fell by 9.2 million or 6.1 percent. This disconnect, pointed out by Dr. Sahm, may suggest that wage and salary data are painting an overly-rosy picture of the economy. While the staff of stats agencies hold a special place in my heart, wage and salary data for November 2020 are preliminary estimates from incomplete sources. As new data become available, the November 2020 estimates, produced by the Bureau of Economic Analysis (BEA), will be revised. Two years after the previous recession ended, BEA economists were still lowering their estimates of the wages and salaries received during the recession.
So Dr. Sahm is right; the disconnect between earnings data and payrolls data is concerning. The most plausible explanation for this gap comes from John Vorheis, who posits that jobs permanently lost were disproportionately low wage, while jobs that have come back or were not lost have more wage growth. To test this, I’ll try to estimate the gap.
First, let’s estimate what total wages and salaries might have been in 2020 for the people who were employed in 2019, if they had all remained employed. For an upper-bound estimate, the average wage growth for individuals was around six percent in 2019. Six percent growth in wages and salaries would result in an annual rate of $10 trillion in November 2020, around $400 billion more than the current estimate, or $43,500 for each missing job. The result produced by assuming six percent growth is plausible, but I’m not sure that six percent growth is a realistic assumption.
As an alternative estimate, in the first two months of 2020 total wage and salary growth was 4.5 percent while payroll growth was 1.5 percent, meaning individual wage and salary growth was around three percent. A more-realistic continuation of three percent growth would result in annual wages and salaries of $9.7 trillion in November 2020, around $100 billion above the current estimate, or $10,900 per missing job.
The more-realistic estimate, based on three percent individual wage and salary growth, suggests to me that the preliminary wage and salary data and the payrolls data do not match. It’s worth thinking therefore about possible reasons for revisions to the data. In 2019, the BEA increased total wage and salary figures by $111 billion to adjust for under-reporting of tips in taxes returns, and added $430 billion to adjust for employees paid while bypassing unemployment insurance (NIPA table 7.18). The adjustments for 2020 are not available yet, but I could imagine a situation where tips are far lower and more likely to be reported and fewer people are trying to bypass unemployment insurance. If this is the case, the current estimates of wages and salaries could be revised downward.