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Mortgage

Fed: Wages grew in recession, went flat in recovery

Given how home prices are outstripping wages — trouble ahead?

Earlier this week RealtyTrac reported that wage growth has fallen behind home price growth by a ratio of 13:1 in three out of every four markets in the United States surveyed.

Now comes a report from the Federal Reserve Bank of Cleveland that, perhaps counter-intuitively, wages grew faster during the recession, and have become stagnant in the “recovery.”

Cleveland Fed researchers Joel Elvery and Christopher Vecchio found that the real average hourly wage rose 3.7% in the US from 2007 to 2010 and fell 2.2% from 2010 to 2013.

They also note that the drop in wages would have been more severe had there not also been an increase in the share of employment in occupations with above-average wages.

The researchers say this was true for the nation as a whole and for the four states (Kentucky, Ohio, Pennsylvania, and West Virginia) and four metropolitan areas (Cincinnati, Cleveland, Columbus, and Pittsburgh) that they looked at.

According to Elvery and Vecchio, the increase in the average wage in the US during the recession came from an increase in the share of employment in higher-wage occupations as well as rising wages within occupations. In the recovery, there was a 2.5% decline in the average wage due to within-occupation wage changes, and shifts in the occupational mix had a small positive effect (0.3%). This implies that, on average, people who did not change occupations experienced declines in their real hourly wage between 2010 and 2013.

The researchers say the rise in wages during the recession and fall during the recovery may be due to so-called “selection effects.” They explain that, during recessions, firms tend to retain their most productive workers, both across and within occupations.

“Furthermore, less productive firms are more likely to lay off workers during recessions, which would also increase average productivity within occupations. Wages are closely linked to productivity, so the selection effects that increase within-occupation productivity also increase within-occupation wages,” the report says. “As hiring increases during a recovery, people who were laid off during the recession – who tend to have lower productivity than people in the same occupation who remained employed – find new jobs, which would pull down the average productivity (and wages) of the workers within an occupation.”

As for home prices, they have been growing at a fast clip compared to wages.

“Home prices in many housing markets across the country found a floor in 2012 and since then have rapidly appreciated, particularly in markets attracting institutional investors, international buyers or some other flavor of cash buyer not constrained by income as much as traditional buyers,” said Daren Blomquist, vice president at RealtyTrac. “Eventually, however, those traditional buyers will need to play a bigger role in the housing market for the recovery to maintain its momentum.”

According to RealtyTrac’s report, the national median wage grew 1.3% from the second quarter of 2012 to the second quarter of 2014. During the same time period, home prices increased by 17% in the two years ending in December 2014, outpacing wage growth by a 13:1 ratio. 

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