PayScale Index Shows Wages Dropped In Q2

22 metros saw a Q/Q decline in nominal wages

Since 2006, PayScale has been producing the PayScale Index, which tracks quarterly and annual trends in compensation. Admittedly, the PayScale Index hasn’t shown a lot of fluctuation over the last few years, mostly due to the fact that America has been experiencing its best economy since the great recession in 2008 with a historically low level of unemployment.

Given this information, it was interesting to see that the most recent numbers from the PayScale Index showed that both nominal and real wages had declined quarter over quarter. We found that due to inflation rising faster than wage growth that workers in Q2 2018 are earning 1.4 percent less “real wages” than they did a year ago, making it the largest real wage drop since Q1 2014.

It wasn’t just real wages that took a hit in Q2. Nominal wages also declined. Even though the PayScale Index shows that national wages are 1.1 percent higher than they were this time last year, nominal wages still declined 0.9 percent when we compared those numbers to Q1 2018. We also saw that 22 out of the 31 metro areas that we cover in the PayScale Index experienced a quarter over quarter decline in nominal wages. The hardest hit metros were
 

 

 
 

While the PayScale Index is one example of an economic indicator, it is not the only source and those using the information should know that it might provide different trends than what you might see from the Employment Cost Index or similar sources. At any rate, we felt like it was worth speculation and asked our Chief Economist Katie Bardaro to weigh in with her own theories about why wages dropped.
 
The unemployment numbers may be painting a rosier picture compared to the reality for many workers. There are still a segment of workers who haven’t re-entered the labor force since the Great Recession. Although the Labor Force Participation Rate has slightly improved as of late, it still remains far below pre-recession levels (62.9% vs. 66%).
 
Highly paid workers are being swapped out for low paid workers for two reasons. First, as the Baby Boomers increasingly retire they are replaced by Gen Z and Gen Y workers, who have less experience and less accumulated years of salary growth. Secondly, many workers are shifting from involuntary part-time work to full-time work, but much of this full-time work is in lower wage jobs.
 
People who previously took a break from the labor force are re-entering as the labor market tightens. However, research shows an extended break from the labor force carries with it a wage penalty. For those who have been out of the labor force for 12 months or more, we observe a 7 percent pay penalty relative to other workers with similar characteristics who haven’t left the labor force.
 
Instead of increasing base pay, businesses are leaning on spot and retention bonuses as they don’t exist in perpetuity. Further, with a high degree of uncertainty in the market, businesses are likely to opt for a temporary solution versus a permanent one. This coincides with findings from our annual compensation best practices report, which surveys more than 7,000 organizations on their compensation plans. Although we collect bonus information, due to the rolling nature of our data collection, respondents who have not yet received a bonus for the year cannot report it.
 
Considering all of the above, it remains to be seen whether the data point we observed in Q2 will be a trend in Q3. Additional macroeconomic metrics, which will help further paint a picture, were released on July 27th (Q2 GDP) and on July 31st (June ECI numbers). For more information on the PayScale index, visit payscale.com/payscale-index.