Heterogeneity and the Effects of Aggregation on Wage Growth

Abstract

This paper focuses on the implications of alternative methods of aggregating individual wage data for the behavior of economy-wide wage growth. The analysis is motivated by evidence of significant heterogeneity in individual wage growth and its cyclicality. Because of this heterogeneity, the choice of aggregation will affect the properties of economy-wide wage growth measures. To assess the importance of this consideration, we provide a decomposition of wage growth into aggregation effects and composition effects and use the decomposition to compare growth in an average wage—specifically average hourly earnings—to a measure of average wage growth from the Survey of Income and Program Participation. We find that aggregation effects largely account for average hourly earnings growth being persistently lower and less cyclical than average wage growth over the period 1990-2015, with these effects reflecting a disproportionate weighting of high-earning workers. The analysis also indicates that composition effects now play a more limited role in the cyclicality of wage growth compared to results reported in previous studies for earlier time periods.