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March 1, 2022
Assessing Recent Labor Market Improvement
The US Bureau of Labor Statistics' (BLS) labor report for January 2022 showed that the overall labor force participation (LFP) rate increased 0.3 percentage points from December's published level. This increase put the LFP rate at its highest level since the pandemic began and, taken at face value, might make you think that the labor supply problems that have plagued the recovery from the COVID-19 pandemic were easing.
However, it turns out that this jump in the LFP rate was entirely an artifact of the BLS incorporating population control adjustments into the January labor force data. These are independent estimates of the civilian noninstitutionalized population ages 16 and older used to make sure that labor force statistics computed from the Current Population Survey (CPS) accurately reflect the population and are incorporated into the CPS data each January. The latest adjustments are the first to use information from the 2020 decennial census , and showed that the US population was almost 1 million larger than the published estimate for December 2021. By itself, a jump in the size of the population isn't an issue for comparing LFP rates over time. But the new population adjustments also showed that the population was considerably younger than previously estimated (in particular, the share of the population aged 70 and older was smaller). This shift in the age distribution is important because a younger population generally means a higher rate of participation in the labor force.
The BLS does not revise the historical data when new population control adjustments are incorporated into labor statistics. But it did report that the population control adjustment would have lifted the December 2021 LFP rate for the population ages 16 and older by 0.3 percentage points if it had revised the December data. This increase is the same as the increase in the published LFP rate from December to January. In other words, the December-to-January increase in the published LFP rate didn't indicate an improvement in labor force participation at all.
Clearly the latest population control adjustments complicate comparison of 2022 LFP rates to earlier periods. To construct historical LFP rate series that are more comparable over time, we implemented a simple smoothing method the BLS used previously to account for annual population control adjustments (described here ). This method essentially distributes the level shifts that result from the population control adjustments back over the relevant historical period for each series. To account for the effects of adjustments (made between the decennial census) to the census 2010 population base that were made in January 2013–January 2021, we first smoothed data for January 2012 to December 2020. Then we smoothed the data for January 2012 to December 2021 to account for the effects of the 2020 census population control adjustment introduced in January 2022. We applied the method separately labor force participation rates for the population ages 16 and older, as well as populations ages 16–24, 25–54, and 55 and older. You can see these series in this spreadsheet.
Chart 1 plots the published and smoothed seasonally adjusted LFP rate series for the population aged 16 and older. Notice that the smoothing method results in a gradually increasing upward shift to the LFP rate over the 10-year period, culminating with the December 2021 smoothed LFP rate 0.3 percentage points higher than the published LFP rate.
The upward shift is even greater for the population aged 55 and older shown in chart 2. Recall that a significant part of the population adjustment was a reduction in the size of the population aged 70 and older. Given that this age group has a lower LFP rate than those aged 55 to 69, the composition shift pushed the LFP rate higher for the 55 and older population overall. The BLS estimated that the population adjustment impact on the December 2021 LFP rate for this population group was 0.7 percentage points.
For the population aged 16–24, the smoothed series shown in chart 3 is lower than the published series through December 2021. This is because the population adjustments revealed that the population aged 16–19 was larger than previously estimated. Because the 16–19 age group has a lower LFP rate than those aged 20–24, the smoothed LFP rate series is lower than the published series. The BLS estimated that the population adjustment impact on the December 2021 LFP rate for this population group was −0.3 percentage points.
Finally, for the prime-age population (25–54), the smoothed series shown in chart 4 is identical to the published series. The population adjustments had no effect on the LFP rate for this age group.
It is important to consider how the difference between the published and smoothed series may alter one's assessment of labor market dynamics surrounding the pandemic-induced recession and subsequent recovery. Chart 5 shows that for the initial year of the pandemic, measured here as the change in the LFP rates from January 2020 to January 2021, the published LFP rate data (blue bars) and the smoothed estimates (green bars) tell a very similar story for all age groups: LFP rates declined between 1.5 percentage points and 2.0 percentage points for all age groups, with no material difference in the size of the change between the smoothed and published estimates within each age group.
However, the story is much different for the period between January 2021 and January 2022. Chart 6 depicts this difference, showing that the published LFP rate for the population aged 16 and over increased by nearly 0.8 percentage points over that 12-month period. In contrast, the corresponding smoothed estimate increased by only 0.5 percentage points. The discrepancy is even greater for the population aged 55 and older. For that age group, the published LFP rate increased by 0.8 percentage points, whereas the smoothed LFP rate shows an increase of less than 0.2 percentage points during the past year. That is, the smoothed data suggest the increase was less than one quarter as large as the increase in the published data. For the population aged 16–24, the smoothed LFP rate increased by more than the published series (0.7 percentage points versus 0.5 percentage points). Finally, for the population aged 25–54, there is essentially no difference between the change in the published and smoothed estimates. Both increased by close to 0.9 percentage points from January 2021 to January 2022.
To sum up, smoothing the labor force data to account for the annual population adjustments like that described here provides a way to allow LFP rates in 2022 to be compared to prior years. These estimates show that the recovery from January 2021 to January 2022 in the overall LFP rate and the rate for the population aged 55 and older is more modest than the published data would imply, while the recovery for the population aged 16-24 is better than implied by the published estimates.
Going forward, the published labor force data for January 2022 will be comparable with data for other months in 2022 since they are all based on the same population control adjustments. In January 2023, the BLS will likely incorporate new population adjustments that use additional 2020 census information. Hopefully those adjustments will be less eventful. Stay tuned as we discuss future data.
February 3, 2022
Rounded Wage Data and the Wage Growth Tracker
The US Census Bureau recently announced some changes it plans to make this year to the Current Population Survey Public Use File (CPS PUF). Here at the Atlanta Fed, we use data from the CPS PUF to construct the Wage Growth Tracker, and one of the planned changes will significantly affect the tracker. Specifically, a person's usual weekly or usual hourly earnings, which are unrounded currently, will be rounded.
The Wage Growth Tracker bases its results on the median, or middle, observation in the distribution of percent wage changes for a sample of individuals linked between the current month and the same month a year earlier. The Wage Growth Tracker time series has yielded useful insight into the rapidly shifting dynamics of the labor market in the wake of COVID-19, especially as compositional effects have distorted wage data. It's also helped economists and policymakers understand which income levels were seeing the greatest growth and that job switchers were finding the most wage gains.
How will the rounding of wage data affect the Wage Growth Tracker? The announced CPS PUF rounding rules vary by wage level and are different if the earnings are reported on an hourly or weekly basis. (You can see more details here .) Most people in the CPS report earnings on an hourly basis, and most wage observations range from $10 to $99.99 an hour. Under the rounding rules those earnings will be rounded to the nearest dollar. So, for example, if someone reports making $14.50 an hour, that wage will be rounded to $15, while workers reporting a wage of $15.40 an hour will also have that wage rounded to $15.
One implication of the rounding rules is that it will make no wage change appear more common than it currently is. To illustrate, suppose someone's pay went from $14.50 to $15.40 an hour. The rounding rules would show no change in the person's wage (both would be recoded as $15) even though that person's actual wage increased by 6.2 percent. Chart 1 shows what happens to the proportion of zero wage changes if the rounding rules were applied to the CPS PUF earnings data used to construct the Wage Growth Tracker from 1998 to 2021.
As you can see, during the Great Recession, when labor demand was especially weak, about 17 percent of wage growth observations based on unrounded earnings data were zero. But if the rounding rules had been applied back then, more than 25 percent of wage growth observations would have been zero.
Obviously, this change is a big deal for the Wage Growth Tracker. When more than a quarter of the observations are zero near the middle of the wage change distribution, it is very likely that the median observation will also be zero. This effect is evident in chart 2, which compares the median Wage Growth Tracker series using unrounded earnings data with what it would have been if the rounded data had been used.
Clearly, if the rounding rules had been in place in the past, the Wage Growth Tracker time-series would be a much less useful indicator of wage growth or labor market trends.
So, what to do? It turns out that the rounding rules don't affect all summary measures of wage growth as much as they affect the median measure. For example, as chart 3 shows, the mean—or average—wage growth comes out of the rounding changes essentially unaffected.
Unfortunately, not only is the average higher than the median, because wage growth varies greatly across individuals (the monthly sample standard deviation is typically around 25 percent), you can also see that both of the average wage growth series are much more variable month to month than the median series using unrounded data. Indeed, the robustness to variability in the underlying wage change data is a primary reason why the Atlanta Fed's Wage Growth Tracker is based on median rather than average wage growth.
But there is potential solution. Borrowing from the research on using trimmed means of price change data to construct measures of inflation that are robust to extreme price changes, I was able to construct a trimmed-mean wage growth series using the rounded data that has broadly similar properties to the (median) Wage Growth Tracker series constructed from unrounded data. Specifically, for each month's sample, I excluded the bottom 20 percent of wage growth observations (that is, the largest percent wage declines) and the top 25 percent (the largest percent increases) and computed the average of the remaining data. (Note that the trimming is asymmetric because more of the large wage changes tend to be increases than decreases, which is also why the average is higher than the median in the previous chart.)
Chart 4 shows the trimmed-mean series constructed using rounded earnings data, along with the (median) Wage Growth Tracker series that uses unrounded data. I would describe this trimmed-mean series as a reasonable (though not perfect) approximation of the Wage Growth Tracker series (something we could have used if we only had rounded earnings data in the past).
When the January 2022 CPS PUF data become available in February, we will produce the trimmed-mean version of the overall Wage Growth Tracker and add it to the Atlanta Fed's Wage Growth Tracker data set. We are currently exploring if a similar approach will produce useful alternatives to the Wage Growth Tracker for other ways to view the data, such as those for job switchers versus job stayers, or by average wage level. Watch this space for updates.
January 12, 2022
Hybrid Working Arrangements: Who Decides?
Even after—or should we say "if"?—working from home eventually becomes less of a necessity, it's likely to stick around in a hybrid form, with some working days performed at home and some in the office. (This recent study , coauthored by three of this post's authors, also makes this case.) Still, much remains undetermined about how that hybrid arrangement will work and who at the firm decides how many and which days employers will require workers to be onsite.
To shed some light on how hybrid working arrangements are working, we posed a few special questions to executives in our Survey of Business Uncertainty (SBU) last July and again last month (December 2021). Specifically, we asked, "Does your firm currently have employees who work remotely?" If they said yes, we followed that up with the question, "Who decides which days and how many days employees work remotely?" Respondents selected options ranging from fully decentralized to company-determined schedules. (The results between the July and December surveys were nearly identical, so we've combined them here to simplify this discussion.) Among firms in our panel, 53 percent have employees who work remotely, and their survey responses are interesting (see chart 1).
As you can see, respondent firms are roughly split, with about 30 percent leaving the decisions up to their employees, 30 percent giving teams (or team leads) decision rights, and nearly 40 percent indicating the decision on how many and which days employees will be remote resides at the company (management) level.To dig into these results a bit further, we looked at who makes these decisions over working arrangements by industry and firm size. Given the differences across the industrial sector's ability to work from home (see research by Jonathan Dingel and Brent Neiman), we find it somewhat surprising that little difference exists across industries about whether the decision to work remotely is fully decentralized, made at the team level, or determined by the company (see chart 2).
However, we see a stark difference when comparing these decision rights by firm size. More than half of the smallest firms in our panel (those with fewer than 25 employees) allow the employees to decide how and when to come into the office, compared to just 10 percent of larger firms (with 250 employees or more). Instead, these larger firms have left decisions about remote work with the team. Although that's certainly far from a rigid, top-down approach, it can suggest a need for coordination among teams, and this variation highlights remote work's big trade-off: balancing employee choice with the coordination that work life sometimes requires.
Allowing employees to choose their teleworking days has the benefit of flexibility, letting them to plan their work schedules around some nonwork commitments. But it has the cost of limiting face-to-face meetings, as on any given day of the week larger teams will likely find one or more members working remotely, which forces meetings partly or completely online. In our discussions with larger firms, they highlight the importance of face-to-face interactions and so have been promoting team- or company-level coordination. Interestingly, smaller firms appear to be walking another path: providing greater individual choice. Which one of these approaches becomes prevalent should become clear by the summer, when employees can (hopefully) return to the office. Though the future of office work appears to be a hybrid one, the form of decision making that will dominate that future has yet to be determined.
November 10, 2021
Compositional Distortions to a Measure of Wage Growth during the Pandemic
Measures of year-over-year growth in wages (or hourly earnings) used in economic analysis often tell a fairly consistent story. For example, chart 1 makes it apparent that wage growth was generally higher heading into the 2007–09 recession than heading out of it and that wage growth stayed low for the first half of the 2010s before trending up moderately over the second half of the decade. However, with the onset of the COVID-19 pandemic, growth in average hourly earnings from the US Bureau of Labor Statistics' (BLS) establishment survey (the blue line in the chart) deviated substantially from the other two series depicted.
The leisure and hospitality industry provides a useful illustration of why the establishment survey measure of hourly earnings growth spiked in March and April of last year. In February 2020, average hourly earnings for production and nonsupervisory workers in leisure and hospitality were 40 percent lower than they were for all private nonfarm payroll workers. And although the leisure and hospitality industry accounted for just under 14 percent of private nonfarm production and nonsupervisory jobs in February 2020, it accounted for nearly 40 percent of the lost private production and nonsupervisory jobs in the subsequent two months. The 4.5 percentage point increase from February 2020 to April 2020 in the blue line in chart 1 falls by 1.9 percentage points if we remove leisure and hospitality from the calculation.
The August 2020 FRBSF Economic Letter—aptly titled "The Illusion of Wage Growth"—by Erin E. Crust, Mary C. Daly, and Bart Hobijn shows that restricting the sample to people employed in the second quarters of 2019 and 2020 reduced growth in median usual weekly earnings over that period by nearly 8 percentage points from the published rate of 10.4 percent. The Atlanta Fed's Wage Growth Tracker, which uses the same type of restriction, and the Employment Cost Index (ECI), which controls for employment share changes among industries and occupations , were not subject to the illusion of wage growth shown by the blue line in chart 1.
Unfortunately, the adjustments used in the Wage Growth Tracker and the ECI are not feasible with the establishment survey measure of hourly earnings because that measure is constructed solely from the information in each month's employment report. As an alternative, Goldman Sachs provides an adjustment for what it terms the composition bias in the establishment survey measure. This adjustment keeps hours worked fixed at their year-ago level in the wage calculation using industry-level data.
I've written an appendix that provides the details of a related approach for calculating a composition-adjustment term from the monthly establishment survey data. Besides adjusting for industry composition, this approach also adjusts for types of workers: production and nonsupervisory workers versus nonproduction/supervisory employees. The appendix also shows that adjusting for worker type and industry rather than industry alone materially affects the composition-adjusted measure of average hourly earnings for April 2020. It also shows that—unlike measures from the BLS and the San Francisco Fed, which control for educational attainment—the measure of labor composition (sometimes called labor quality ) constructed with only establishment survey data has not trended up much since the mid-2000s.
The basic intuition underlying the approach described in the appendix is that, apart from some trivial rounding error, the BLS measure of aggregate weekly payrolls is equal to the product of average hourly earnings and aggregate weekly hours worked. So, in much the same way that we can express nominal gross domestic product (GDP) as the product of real chain-weighted GDP and a GDP price deflator, aggregate weekly payrolls can also be decomposed as the product of composition-adjusted measures of wages and hours worked. This approach maintains the equality with aggregate payrolls since the composition adjustments to hourly earnings and hours worked offset each other exactly.
Chart 2 shows the results of adjusting for changes in both industry and worker type for measures of average hourly earnings growth and aggregate hours worked during the pandemic. Adjusting for composition makes average hourly earnings growth during the pandemic more like the ECI and Wage Growth Tracker measures, but, nevertheless, some important differences exist. Unlike the composition-adjusted measure of nominal wage growth, the ECI and Wage Growth Tracker measures languished in the second half of 2020 and surged in their most recent readings. Composition-adjusted hourly earnings grew 1.1 percent from March 2020 to April 2020, which is less than the 4.6 percent spike in the unadjusted measure but still strong enough to suggest that the adjustments made here still miss some meaningful changes in worker composition in the earliest months of the pandemic.
As you look at this chart, note that the adjustment is constructed using wage and hours data for 253 industry groups, all but 10 of which are further split into production and nonsupervisory and nonproduction/supervisory employee groups.
The right panel in chart 2 shows private nonfarm payroll employment alongside the standard measures of aggregate hours worked and a measure adjusted for industry and worker-type composition. In October, private nonfarm payroll employment, hours worked, and composition-adjusted hours worked were 2.5, 1.7, and 1.2 percentage points, respectively, below their February 2020 levels.
The composition-adjustment factor (industry by production/supervisory worker employment type) as well as the associated measures of composition-adjusted hours worked and hourly earnings are available here . Future updates of this Excel file will also be available at this link.
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