Graphing Carefully: Wages and The Way We See Them

Perhaps one of these days we’ll have a serious discussion about wages and salaries during which someone doesn’t abuse charts and graphs.  Not that I’m all that optimistic about the prospect, but I’d be more enthusiastic if more people were better at reading graphs and charts — and not taking the first graph at face value.  Here’s an example.

I print out a graph from one of my favorite sources, FRED, concerning wages and salaries in the United States since 1964.

Average Hours dollar value

Note that the graph is labeled “dollars per hour.”  Looks nice doesn’t it? What could employees possibly have to argue about when the thin blue line climbs upward?  And has done since 1964.  (We’ll leave inflation for another day.)

Wait a minute, we can take the same basic graph, reset the Y axis, to “percent change from the previous year,” and suddenly there’s a declivitous drop in what employees might expect in the pay packet, with ramifications for  financial planning.

Average Hours percent change

Not to mince too many words, but if workers in the 1980s were expecting a general upward trend to continue in the increase in their earnings YOY they’d be sorely disappointed.  This has some implications for financial planning.  If Family A expects earnings to increase over a twenty year period — or thirty in the case of a common mortgage — then they’re probably guessing that the percentage increase in their hourly earnings will be in positive territory on an annual basis — but that’s not what happened.

There’s a third way to look at essentially the same basic data.  Let’s change the Y Axis to “Change from a year ago, dollar value.”  Now the graph looks like this:

Average Hours change YOY

The shaded gray areas indicate recessions.  Notice it took until about 1987 before the trend started to regain lost ground in the YOY “dollars per hour” after the recession in the 1980s.  The current recessionary period was about as long, but note it hasn’t taken quite as long to recover in terms of YOY “dollars per hour.”

If we put the last two graphs together,  we can see a situation in which families can see a trend in which their income from wages as expressed in dollars per hour is “coming back.”  However, what they can’t assume is that  the percentage increase in their income from wages will be as assuring as it was before the recession of the 1980s.

Now, go read the article in Business Insider concerning the acceleration of wages and its implications for Federal Reserve monetary policy.

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