MainStreet Macro: Right Direction, Wrong Reason

Last week we reported that wages for U.S. workers grew 4.4%. On Main Street, that translates to about a buck and a quarter increase in average hourly take-home pay, to $30.19. It’s a much stronger increase than the historical average.

Like other macro-level indicators, however, this headline wage number masks ongoing job market turbulence caused by COVID-19.

To get a closer look, we turn to ADP data on wages, which draws information each month from approximately 250,000 companies and 18 million employees, about 15 percent of all U.S. private sector employees.

 Source: ADP Research Institute, Workforce Vitality Report

Our deeper look at the employment data reveals that the most persistent and steepest job losses are among lower-income workers. When those low-paying jobs are removed from the mix, the big-picture data will show that wages are growing.

In fact, for the majority of workers, wages were either flat or barely growing above inflation in December.

Income Group	<$20K	$20K – $50K	$50K – $75K	$75K+
Hourly Wage	$11.93	$17.20	$27.57	$59.44
Wage Growth	6.2%	1.9%	-0.4%	0.1%
Employment Share	22.6%	37.7%	17.6%	22.2%

Source: ADP Research Institute, Workforce Vitality Report

Ironically, one triumph of Fed policy pre-COVID was that low-wage job growth was starting to pick up after 10 years of economic expansion. Now data shows that wages are growing, but for the wrong reason. 

Roads diverging

The economic rebound has gone from V-shaped to K-shaped, meaning low-income households are actually faring worse while the rest of the economy improves.

So when aggregate measures of the economy show improvement, they need to be examined. Last week, preliminary fourth-quarter GDP came in weaker than expected at 4% instead of the consensus 4.3%. 

That leaves 2020 just 2.3% shy of 2019 levels. Given the human toll and disruption of the virus, that isn’t so bad when all is said and done.

But take a closer look. 

Yes, the economy as a whole has mostly returned to pre-pandemic levels, but the job market hasn’t.

The difference between the two is productivity. Economists define productivity as output per hour worked (or as moms like me define it, how many times I have to say “clean your room” or “do your homework” before the task is completed).

Increased productivity generally goes hand in hand with higher GDP per capita and–yes!–higher wages. Since the 1990s, U.S. productivity growth has been soft. Even the widespread adoption of personal computers and the internet wasn’t enough to push productivity above historical levels. Since the Great Recession in 2009, output per worker has weakened further still.       

Source: U.S. Bureau of Labor Statistics, St Louis Federal Reserve Economic Research

But look at the second quarter of last year, when the coronavirus pandemic was bearing down.  Productivity skyrocketed – but again for the wrong reasons. 

Output fell more than 37% and the number of hours worked decreased nearly 43%. 

Because the drop in hours people worked exceeded the drop in the amount of stuff produced, the economy overall was more productive. Not exactly great news for companies or workers!

The news was better in the third quarter. Because the drop in hours worked exceeded the drop in the amount of stuff produced, the economy overall was more productive. It’s like the LeBron James of indicators — one guy is putting all the points on the board while the rest of the team is sitting on the sidelines.

It’s unlikely this rise in productivity can continue at the same pace. And with millions of workers still unemployed and large swaths of businesses still struggling to stay afloat would Main Street even want it to?

That’s why this week I’ll be watching fourth-quarter productivity data to see whether broad gains in output come at Main Street’s expense.

My take

As we head into 2021, there are reasons for Main Street to have hope, including increased momentum in the vaccine rollout. But now that the easy part of the recovery is mostly in the rearview, what lies ahead is the hard work of new business formation, technology enhancements and job creation that leads to sustainable productivity gains. That’s what gets Main Street wages moving in the right direction for the right reason.