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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


October 01, 2018


Demographically Adjusting the Wage Growth Tracker

In a recent report, the Council of Economic Advisers (CEA) referred to the Atlanta Fed's Wage Growth Tracker, noting its usefulness as a people-constant measure of wage growth because it looks at the over-the-year changes in the wages for a given set of individual workers. The CEA's preferred version of the Wage Growth Tracker is the one created by my colleague Ellie Terry and described in this macroblog post. It weights the sample of individual wage growth observations so that the worker characteristics resemble the population of wage and salary earners in every month. However, the CEA report also noted that this measure does not adjust for the fact that the characteristics of wage and salary earners have changed over time.

The following table, which shows the percent of workers in different age groups for three years (in three different decades), illustrates this point. The statistics are shown for the unweighted Wage Growth Tracker sample (the green columns), and for the population of wage and salary earners (the blue columns).

 

Wage Growth Tracker Sample

Wage and Salary Earner Population

 

16-24

25-54

55+

16-24

25-54

55+

1997

10.0

77.8

12.2

15.5

73.3

11.2

2007

8.5

71.7

19.8

14.1

69.2

16.7

2017

7.5

65.8

26.7

12.8

65.1

22.1

Source: Current Population Survey, author's calculations

The table shows that the Wage Growth Tracker sample in each year has fewer young workers (and more old workers) than does the population of all wage and salary earners, a fact for which the weighted version of the Wage Growth Tracker adjusts. However, the weighted version doesn't adjust for the fact that the workforce has also become older over time—the share of workers over 54 years old has risen nearly 11 percentage points since 1997.

Shifts in the distribution of demographic and other characteristics over time could matter for measures of wage growth because, for example, wage growth tends to be much higher for young workers. Young workers switch jobs more often, whereas workers aged 55 and older tend to have the lowest rates of job switching. Other changes in the composition of the workforce could also be important, such as changes the mix of education, the types of jobs, etc.

To investigate the impact of changes in workforce characteristics over time, we developed another version of the Wage Growth Tracker. This one weights the sample for each month so that it is more representative of the wage and salary earner population that existed in 1997. So, for instance, it always has about 15.5 percent aged 16-24, 73.3 percent aged 25-54, and 11.2 percent over 54 (the blue columns in the 1997 row of the table above).

As the following chart shows, the shifting composition of the workforce has put some additional downward pressure on median wage growth in recent years. That is, median wage growth would be even stronger if the sample each month looked more like it came from the population of wage and salary earners in 1997.

All three versions of the Wage Growth Tracker—unweighted, weighted to each month's workforce characteristics, and weighted to 1997 workforce characteristics—are available in the data download section of the Wage Growth Tracker web page. Which one you prefer depends on the question you are trying to answer. The monthly weighted version makes the Wage Growth Tracker more representative of the characteristics of the employed in each month, and in doing so gives young workers more influence, but it does not control for the fact that today's workforce has a smaller share of young workers than in the past. The 1997-weighted version fixes the workforce characteristics at their 1997 levels. It says that the median growth in individual wages would be higher than it is today if the composition of the workforce had not changed (other things equal). Nonetheless, any version of the Tracker you consult in the previous chart tells a pretty similar overall story: median wage growth is significantly higher than it was five or six years ago, but it hasn't shown much acceleration over the last couple of years.

October 1, 2018 in Employment , Labor Markets , Wage Growth | Permalink | Comments ( 0)

August 23, 2018


What Does the Current Slope of the Yield Curve Tell Us?

As I make the rounds throughout the Sixth District, one of the most common questions I get these days is how Federal Open Market Committee (FOMC) participants interpret the flattening of the yield curve. I, of course, do not speak for the FOMC, but as the minutes from recent meetings indicate, the Committee has indeed spent some time discussing various views on this topic. In this blog post, I'll share some of my thoughts on the framework I use for interpreting the yield curve and what I'll be watching. Of course, these are my views alone and do not reflect the views of any other Federal Reserve official.

Many observers see a downward-sloping, or "inverted," yield curve as a reliable predictor for a recession. Chart 1 shows the yield curve's slope—specifically, the difference between the interest rates paid on 10-year and 2-year Treasury securities—is currently around 20 basis points. This is lowest spread since the last recession.

The case for worrying about yield-curve flattening is apparent in the chart. The shaded bars represent recessionary periods. Both of the last two recessions were preceded by a flat (and, for a time, inverted) 10-year/2-year spread.

As we all know, however, correlation does not imply causality. This is a particularly important point to keep in mind when discussing the yield curve. As a set of market-determined interest rates, the yield curve not only reflects market participants' views about the evolution of the economy but also their views about the FOMC's likely reaction to that evolution and uncertainty around these and other relevant factors. In other words, the yield curve represents not one signal, but several. The big question is, can we pull these signals apart to help appropriately inform the calibration of policy?

We can begin to make sense of this question by noting that Treasury yields of any given maturity can be thought of as the sum of two fundamental components:

  • An expected policy rate path over that maturity: the market's best guess about the FOMC's rate path over time and in response to the evolution of the economy.
  • A term premium: an adjustment (relative to the path of the policy rate) that reflects additional compensation investors receive for bearing risk related to holding longer-term bonds.

Among other things, this premium may be related to two factors: (1) uncertainty about how the economy will evolve over that maturity and how the FOMC might respond to events as they unfold and (2) the influence of supply and demand factors for U.S. Treasuries in a global market.

Let's apply this framework to the current yield curve. As several of my colleagues (including Fed governor Lael Brainard) have noted, the term premium is currently quite low. All else equal, this would result in lower long-term rates and a flatter yield curve. The term premium bears watching, but it is unclear that movements in the premium reflect particular concerns about the course of the economy.

I tend to focus on the other component: the expected path of policy. When we ask whether a flattening yield curve is a cause for concern, what we are really asking is: does the market expect an economic slowdown that will require the FOMC to reverse course and lower rates in the near future?

The eurodollar futures market shows us one measure of the market's expectation for the policy rate path. These derivative contracts are quoted in terms of a three-month rate that closely follows the FOMC's policy rate, which makes them well-suited for this kind of analysis. (Some technical details regarding this market can be found in a 2016 issue of the Atlanta Fed's "Notes from the Vault.")

Chart 2 illustrates the current estimate of the market's expected policy rate path. Read simply, the market appears to be forecasting continuing policy rate increases through 2020, and there is no evidence of a market forecast that the FOMC will need to reverse course in the medium term. However, the level of the policy rate is lower than the median of the FOMC's June Summary of Economic Projections (SEP) for 2019 and 2020.

Once we get past 2020, the market's expected policy path flattens. I read this as evidence that market participants overall expect a very gradual pace of tightening as the most likely outcome over the next two years. Interestingly, the market appears to expect a slower pace of tightening than the pace that at least some members of the FOMC currently view as "appropriate" as represented in their SEP submissions.

For this measure, I find the short-term perspective most informative. As one looks further into the future, the range of possible outcomes widens, as many the factors that influence the economy can evolve and interact widely. Thus, the precision of any signal the market is providing about policy expectations—if indeed there is any signal at all—is likely to be quite low.

With this information in mind, I do not interpret that the yield curve indicates that the market believes the evolution of the economy will cause the FOMC to lower rates in the foreseeable future. This interpretation is consistent with my own economic forecast, gleaned from macroeconomic data and a robust set of conversations with businesses both large and small. My modal outlook is for expansion to continue at an above-trend pace for the next several quarters, and I see the risks to that projection as balanced. Yes, there are downside risks, chief among them the effects of (and uncertainty about) trade policy. But those risks are countered by the potential for recent fiscal stimulus to have a much more transformative impact on the economy than I've marked into my baseline outlook.

I believe the yield curve gives us important and useful information about market participants' forecasts. But it is only one signal among many that we use for the complex task of forecasting growth in the U.S. economy. As the economy evolves, I will be assessing the response of the yield curve to incoming data and policy decisions along the lines I've laid out here, incorporating market signals along with a constellation of other information to achieve the FOMC's dual objectives of price stability and maximum employment.

August 23, 2018 in Economic conditions , Federal Reserve and Monetary Policy , Monetary Policy | Permalink | Comments ( 0)

August 15, 2018


Does Loyalty Pay Off?

A newspaper article last week posed the question: Why do bosses pay new hires better than loyal staffers? The article looked at the Atlanta Fed's Wage Growth Tracker data on job stayers versus job switchers and noted that job switchers are getting a bigger percentage gain in their pay than job stayers.

Does that mean that people who switch jobs are paid better than those who stay with their employer? Well, it's useful to keep in mind that job switchers and job stayers differ along a number of dimensions, and perhaps the most important is that job switchers tend to earn less than job stayers. For example, using the data that go into constructing the Wage Growth Tracker we see that the median job switcher's pay in 2017 was around 9 percent lower than the median pay of those who stayed in their job. So even though the 2017 median wage growth for job switchers was 3.9 percent versus 3.0 percent for job stayers, those who change jobs are typically paid less than those who don't.

Why is the median pay higher for people who remain in their jobs? For one thing, job stayers in Wage Growth Tracker data are relatively older, with commensurately more work experience. In addition, job stayers tend to be more educated and hence more likely to be in jobs that require specialized skills. Economic theory also suggests that holding a higher-paying job reduces the likelihood of quitting. The argument goes that as a worker's wage increases, other employers will make fewer offers that exceed the person's minimally acceptable wage (their reservation wage). As a result, as an individual moves into better paying jobs, on-the-job search efforts and expected wage growth decline.

So what should you make of the higher median wage growth enjoyed by job switchers in the Wage Growth Tracker data? I view it as an indication that the demand for labor is strong and provides plentiful opportunities for less experienced and less educated workers to improve their circumstances by changing jobs. A job has an option value, and the possibility of getting a better-paying job offer is high when the worker's reservation value is low and the frequency of offers is high.

August 15, 2018 in Employment , Labor Markets , Wage Growth | Permalink | Comments ( 0)

August 08, 2018


Immigration and Hispanics' Educational Attainment

In a previous macroblog post, Whitney Mancuso and I wrote about the improved labor market outcomes for workers with the least amount of formal education. We attributed this improvement mostly to a combination of a secular decline in the supply of these workers over time and a shift in the composition of the low-skilled workforce toward Hispanic immigrants—a group that has an especially high rate of workforce attachment.

In a related article by colleagues at the St. Louis Fed, Alexander Monge-Naranjo and Juan Ignacio Vizcaino explore how the employment characteristics of the Hispanic population have grown increasingly concentrated in low-skilled occupations over time, and they relate this to the relatively smaller gains in the average educational attainment of the Hispanic population.

The authors ask why the education level of Hispanics has lagged behind other groups and suggest that it could be a consequence of intergenerational persistence; it takes a while for the children of poorly educated immigrants to catch up with the rest of the population. This explanation is likely to play a role, especially when considering why a relatively smaller share of U.S.-born Hispanics go to college. The study also notes differences across gender, showing that Hispanic men are less likely than Hispanic women to continue their education after high school, and although the college rate has been rising for all Hispanics, it is growing faster for women.

I also want to note that a large share of the Hispanic population in the United States are foreign born, and these immigrants have a much lower average level of educational attainment than do U.S.-born Hispanics. This observation is evident in table 1, which is based on data on individuals aged 25-54 (prime age) from the Current Population Survey. For instance, in 2017, 57 percent of the U.S. prime-age Hispanic population was foreign born, and 21 percent of these prime-age foreign born Hispanics had a college degree (associate degree or higher). In contrast, 36 percent of U.S.-born prime-age Hispanics had a degree.

Table 1: Selected Characteristics of the U.S. Prime-age Population (percent)

 

Foreign born

Completed a college/associate degree

 

Hispanic

Non-Hispanic

Hispanic

Non-Hispanic

 

 

 

Foreign born

U.S. born

Foreign born

U.S. born

1997

62

9

13

22

48

37

2007

64

12

15

29

56

43

2017

57

14

21

36

64

51

Source: Current Population Survey, author's calculations

As the St. Louis Fed study concludes, a primary factor distinguishing the Hispanic workforce in the United States is their lower average level of educational attainment. Further distinguishing between foreign and U.S.-born Hispanics shows the role that immigration has played in holding down the average education level since a large fraction of Hispanic immigrants have less education.

The Hispanic/non-Hispanic college completion gap remains large and has not closed over time. However, there has been relative improvement in high school completion, as table 2 shows.

Table 2: Selected Characteristics of the U.S. Prime-age Population (percent)

 

Foreign born

Completed 12th grade

 

Hispanic

Non-Hispanic

Hispanic

Non-Hispanic

 

 

 

Foreign born

U.S. born

Foreign born

U.S. born

1997

62

9

50

81

92

92

2007

64

12

55

87

93

94

2017

57

14

65

92

95

96

Source: Current Population Survey, author's calculations

Since 1997, the share of the prime-age foreign born Hispanic population who have finished 12th grade has increased by 15 percentage points. At the same time, the share of prime-age U.S.-born Hispanics completing high school has increased by 11 percentage points and is now not much lower than for non-Hispanics. While relatively low college attendance remains a major obstacle, greater high school completion is encouraging for Hispanics' future role in the workforce.

August 8, 2018 in Education , Immigration , Labor Markets | Permalink | Comments ( 0)

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