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Wages with benefits

Nominal wages generally increase, but the picture is mixed for real wages. The green line in the top graph shows real wage growth, which is negative a fair amount of the time. Bursts in inflation can counteract the usually small increases in nominal wages. In fact, the strong growth of real wages at the end of the past recession is mostly due to a short episode of deflation.

But wages aren’t the whole story. A job usually also involves other types of compensation, such as the employer’s contribution to retirement pensions, health and life insurance, paid vacation and other leave, and any taxes the employer pays on these benefits. These benefits are now a substantial part of the cost of an employee, and they appear to be growing. The top graph shows that labor compensation growth is frequently higher than real wage growth. We can make this point more clearly by using index values: In the bottom graph, we set both series at 100 in 1970 and let them run. Real compensation growth is significantly higher: the 60% increase looks much better than the 3% increase for real wages.

How these graphs were created: Search for “real compensation” and click on the series shown. In the “Edit Graph” panel, add a new line by searching for “hourly earnings.” Then, within the same panel, add a series by searching for “CPI.” Apply formula a/b to the second line to make earnings real. For the first graph, set units for both lines to “Percent Change from Year Ago”; for the second line, you do this at the bottom of the panel. For the second graph, the selected units are “Index (scale value to 100 for chosen period)”; set the date as 1970-01-01.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: AHETPI, CPIAUCSL, RCPHBS

Shaking things up in China

During President Obama’s recent visit to China, even getting off the plane involved political upheaval: The New York Times described the mood as “tense” when disagreements between Chinese and U.S. officials compelled the president to use an alternative stairway to deplane Air Force One.

Chinese economic policy has also been tense for some time now, independent of their ability or willingness to accommodate a foreign 747. The graph above plots the Economic Policy Uncertainty Index from Baker, Bloom, and Davis for the U.S. and China. This index scans news articles about a country and records the frequency of phrases that connote economic policy uncertainty. When it’s high, the press is using language that suggests the government could change its regulations, spending, and/or taxes in the near future. As the authors point out, this uncertainty complicates planning and can adversely affect investment. It can also, however, reflect economic conditions themselves; as the economy sours, the political response is often uncertain as sides debate how best to respond.

Until recently, China and the U.S. tracked each other quite well, and such a connection might reflect common economic conditions in the two countries. But China did not share the U.S. experience during the 2001 recession; it shared only the rise in uncertainty. The bottom graph adds GDP growth to the mix, and the “pattern” we see has almost no pattern to it. GDP is slowing in China, but policy uncertainty seems to be hyperactive. Chinese GDP declined during the Great Recession, and since then the decline seems to have been smooth and slight. Policy language, however, has vacillated quite wildly. Perhaps President Obama should feel lucky his stairway remained in place as he descended.

How these graphs were created: Top graph: Search for “Economic Policy Uncertainty Index” and select the U.S. and China among the countries given. Convert both to a quarterly frequency for two reasons: The frequency of U.S. GDP is also quarterly, and the monthly swings in the Chinese index are so great they make it difficult to visualize the U.S. index. Bottom graph: Add two lines to the top graph: seasonally adjusted real U.S. GDP (converting it to a percentage change) and constant China GDP, which should give the U.S. dollar-denominated GDP (again, converting it to a percentage change). For both these new lines, go to the “Format” tab in the “Edit Graph” section and move the units to the right vertical axis. Note: FRED doesn’t have updated Chinese real GDP after 2014, but the latest figure from the National Bureau of Statistics in China puts growth at 6.7% in 2016:Q2, slightly lower than the 7.3% recorded in 2014, as shown in the graph.

Suggested by David Wiczer.

View on FRED, series used in this post: CHIEPUINDXM, GDPC1, RGDPNACNA666NRUG, USEPUINDXM

Brexit in dollars per pound

You may have heard of Brexit, a portmanteau of Britain and exit. The exit refers to the European Union: On June 23, 2016, U.K. citizens voted to leave the EU, which could have many possible consequences, such as lowering investment and production and reducing imports and exports between the U.K. and the EU. Not much has changed yet; the full effects will take time to materialize. But some financial variables in the U.K. did move after the Brexit vote, including the exchange rate.

The graph shows the evolution of the dollar/pound exchange rate since the beginning of 2016. The red line marks the day of the vote. Before the vote, the exchange rate fluctuated around 1.45 dollars per pound; after the vote, the pound depreciated sharply (relative to the dollar) and the exchange has fluctuated around 1.32 dollars per pound since then. This depreciation may reflect negative expectations about the U.K.’s international trade and its economy in general after the Brexit vote.

How this graph was created: Search for “US UK foreign exchange rate,” select the daily series with units “U.S. Dollars to One British Pound, Not Seasonally Adjusted,” and limit the date range from 2016-01-01 to the present. Now, to create the red line to show when the Brexit vote occurred: In the “Edit Graph” section (orange button in the upper right hand corner), use the “Add Line” option to create a user-defined line and set the start date and end date for that line to be 2016-06-23.

Suggested by Maximiliano Dvorkin.

View on FRED, series used in this post: DEXUSUK

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