What are Average Hourly Earnings?

AHE can be presented in various ways:

• Nominal AHE: The raw figure unadjusted for inflation. This represents current wage levels.
• Real AHE: The figure adjusted for inflation. This provides a clearer picture of purchasing power over time.
• Seasonally adjusted AHE: This metric is adjusted to account for seasonal fluctuations in employment patterns. It can help provide a clearer view of trends over time.

AHE are released every month in the U.S. Bureau of Labor Statistics’ Employment Situation Report, also known as the Jobs Report. The report is published on the first Friday of the month at 8:30 a.m. eastern time and includes the earnings of all private employees, including overtime and late-shift pay but excluding benefits, bonuses, payroll taxes, and retroactive pay.

The Bureau of Labor Statistics also publishes Nonfarm Payrolls each month, which represent change of employment in the nonfarming sector.

How are Average Hourly Earnings calculated?

AHE are calculated by dividing the total earnings of all employees in a particular sector, industry, or demographic by the total number of hours they worked over a set period. This formula provides a snapshot of the average wage earned per hour which can be used to assess wage growth, purchasing power, and broader economic trends.

For example, if employees in a sector earned a collective $500,000 over 20,000 hours worked, the AHE would be $25/hour ($500,000 divided by 20,000).

In the United States, the Bureau of Labor Statistics (BLS) compiles AHE data through a monthly nationwide survey of different employers. The BLS breaks wages down by:

• Sector, region, and state
• Demographics such as gender, age, and race
• Employment trends, including unemployment rates and compensation costs.

Narrowing these data points down offers a more granular overview of data and trends relevant to specific aspects of employment-related information. Wage data is further broken down into industry, age, location, and other demographic characteristics and viewed on a local, state, or national level.

The BLS publishes this information in detailed graphs, charts, and reports related to specific topics like prices, benefits, strikes, productivity, and employment costs. This information can be accessed by the public to identify trends, conduct employment-related research, assess economic health, and speculate about future trends.

How industries differ in Average Hourly Earnings

AHE can vary significantly across industries depending on factors like skill requirements and seasonality. For example, industries that require specialized skills or advanced education tend to have higher AHE. These include finance, technology, and engineering industries.

AHE can also fluctuate seasonally in certain industries to reflect high demand and limited labor supply. For example, hospitality wage rates may increase during peak tourist seasons and dip during off-peak times.

What industries tend to show the highest average hourly earnings?

Industries with the highest AHE are often characterized by specialized skills or advanced education, such as:

• Utilities
• Information Technology (IT)
• Financial Activities
• Professional & Business Services
• Mining & Logging
• Wholesale Trade

The relationship between Average Hourly Earnings and inflation

AHE and inflation both have an influence on consumer purchasing power and the cost of living. AHE reflects the average pay employees earn per hour while inflation measures the rising cost of goods and services over time.

When AHE grows faster than inflation, workers experience an increase in real wages – meaning they can buy more with their earnings. This boost in purchasing power may increase customer spending and contribute to economic growth. When inflation outpaces wage growth, however, it leads to a decline in real wages. This reduces purchasing power and potentially dampens consumer spending and overall economic activity.

Wage-push inflation is one example of the relationship between AHE and inflation. This occurs when rising wages lead to an overall increase in the costs of goods and services. Because employers are faced with higher labor costs, they must raise their prices to maintain profitability. This price increase can create a feedback loop – wage increases lead to higher prices of consumer goods, which require further wage increases to maintain purchasing power.

Wage-push inflation can also impact industries reliant on international trade. Businesses may seek FX trade services to manage costs and hedge against currency fluctuations.

Policymakers and economists closely monitor the relationship between AHE and inflation. While steady wage growth can be a sign of improving living standards and increased consumer spending, it can also contribute to inflationary pressures when not matched by productivity gains.

How to interpret Average Hourly Earnings for economic trends

AHE can offer insights into key economic trends like labor demand, purchasing power, and inflation. Policymakers and economists track changes in the AHE to understand the health of the economy and its trajectory. Here’s what a higher or lower AHE could signal.

Increasing AHE

A rise in AHE often signals a tightening labor market where employers are competing for talent by offering higher wages. This trend can reflect either increased labor demand or potential workforce shortages. In these situations, policymakers may implement strategies to address hiring challenges or expand workforce participation.

Higher AHE could also suggest economic growth and increased purchasing power. Higher earnings generally mean more disposable income, which boosts consumer spending and fuels economic growth. If wage increases outpace productivity growth, however, they can contribute to inflation.

Declining AHE

A stagnant or declining AHE may indicate potential economic challenges such as weak labor demand, inefficiencies in labor policies, or slower job growth. Policymakers might respond with initiatives aimed at creating jobs or improving worker compensation.

Lower or stagnant AHE often correlates with reduced purchasing power, which can decrease consumer spending. This negatively affects businesses and overall economic performance.

Why are Average Hourly Earnings important?

AHE can help businesses, investors, and policymakers assess the broader economic landscape and use those insights to inform their strategies. For example, the AHE can be important for:

Budgeting & financial planning

Businesses can use the AHE to guide their resource allocation decisions. By keeping an eye on wage trends, companies can better plan for payroll expenses and prepare for shifts in labor costs.

Investment decisions

Investors often consider AHE along with other economic indicators when making investment decisions. For example, rising wages in certain industries may signal growth and potential opportunities. Investors often analyze these trends with the help of a capital markets broker to identify sectors with potential growth.

Shaping economic policy

Policymakers use AHE data to monitor the health of the labor market and broader economy. This information can guide policy decisions such as minimum wage laws or workforce development initiatives. For instance, strong wage growth may prompt investors to anticipate central bank rate hikes, affecting stock, bond and currency trends.

What factors can cause fluctuations in Average Hourly Earnings?

Fluctuations in AHE can be influenced by changes in the workforce or the broader economy. These shifts don’t always reflect actual wage growth or decline, but can result from external economic events and policy changes.

Factors that can affect AHE include:

• Inflation: When the cost of living increases, employees seek additional compensation to maintain their purchasing power. This can push wages higher.
• Labor demand: When demand for labor is high, employers often offer higher pay to attract and retain talent. This tends to drive wages up.
• Skill levels: When demand increases for certain specialized skills, wages may increase for those with certifications or expertise.
• Government policies: Changes to minimum wage regulations, particularly in lower-wage industries, can push AHE up.
• Seasonality: Industries with seasonal demands, like hospitality or agriculture, often see fluctuating wages depending on the time of year. This can influence AHE.
• Recessions: During recessions, layoffs disproportionately impact lower-wage workers. This can result in an apparent increase in overall AHE, even if wages are stagnating for the remaining workers.
• Workforce re-entry: Large numbers of employees re-entering the workforce after a period of high inflation (like during the COVID-19 pandemic), may decrease the overall AHE because those returning to work typically have lower wages than those who remained employed.

How do policymakers use Average Hourly Earnings data?

Policymakers use AHE data to guide their economic policies, assess the effectiveness of existing policies, and identify areas that may need intervention. For example:

• A rising AHE can signal a tightening labor market where employers are offering higher wages to attract talent. In this situation, policymakers might consider addressing workforce shortages by promoting skills training programs or adjusting immigration policies to address labor shortages.
• A stagnating or declining AHE can suggest potential economic distress. In response, policymakers might focus on initiatives aimed at job creation or improving labor market conditions.

While higher wages are beneficial for workers, they can also lead to inflationary pressures if wage growth outpaces productivity. Policymakers must carefully balance wage growth with efforts to control inflation to ensure wage increases actually improve workers’ purchasing power.

Policymakers can also use AHE data to assess the effectiveness of existing policies. For example, if the AHE rises after a minimum wage increase, it suggests that the policy contributed to increased wages for workers. Central banks like the Federal Reserve closely monitor AHE as rising wages may signal broader inflationary pressures influencing monetary policy decisions, such as adjusting interest rates.

What is the relationship between Average Hourly Earnings and cost of living

AHE is closely tied to the cost of living as both directly impact workers’ purchasing power. For employees to maintain or improve their standard of living, wage growth must keep pace with inflation. When wages fail to increase in line with the cost of living, purchasing power declines and workers may struggle to cover basic expenses.

This material is for informational purposes only and should not be considered as an investment recommendation or a personal recommendation.