Is it Time for a Raise?

August 17, 2017

Wage growth continues to be one of the most disappointing parts of the recovery as increases in pay are relatively low despite record levels of employment. However, the growth individuals see can vary significantly. This week’s chart shows how $1000 five years ago would have grown under the different quartiles of wage growth, as well as how costs have increased under inflation. Given the low levels of inflation in recent years, it is of little surprise that costs have not changed much, rising just over 6.5% during this time frame. Workers whose raises were consistent with median wage growth gained an extra $150 for every $1000 earned in 2012, which was enough to beat inflation and increase their purchasing power.

What is most notable though, is that those who received the 75th percentile for wage growth nearly doubled their pay, while individuals at the 25th percentile lost more than 10% before inflation. It is important to consider that many workers will not consistently be at one end or another of the spectrum; a promotion one year could put an individual in the top quartile, while the loss of an important customer could move them to the bottom the next. Still, this shines some light on the different scenarios workers are facing as a quarter of the population lost about 2% or more of their income this past year, while another gained over 14%.

Although it seems like this gives some credence to the complaints about rising inequality, it should be noted that the biggest determinant of wage growth is age. Younger workers just starting out their careers saw the largest raises with those age 16–24 gaining almost 8% this year on average, compared to just 2% for those 55 and older. Not surprisingly, those with higher skills and better education also fared better on average. The industry in which a person works is less important than one might expect, with most sectors having a growth rate between 3–4%. Ultimately, given the wide range of wage growth rates this could affect increases in consumer spending with those on the lower end of the spectrum not able to increase their spending habits. Spending growth is more dependent on those who experience larger gains and if they choose to start saving more, economic growth could suffer.

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