Layoffs raised average pay

In April 2020 the U.S. lost more than 20 million jobs. That same month, average hourly earnings were 8.1% higher than a year earlier, the fastest growth since the series began in 2006. That did not mean the typical worker had received an 8% raise.

It was a composition effect. Layoffs fell hardest on low-wage jobs in restaurants, hotels and stores. When the lowest-paid workers drop out of the payroll count, the average pay of those still working rises, even if no individual's pay changes.

The Employment Cost Index tells a different story. It tracks pay for a fixed mix of industries and occupations, which makes it much less sensitive to shifts in who is employed. ECI wage growth didn't spike in 2020; it slowed, to 2.7% in mid-2020. The ECI is published quarterly, so it appears as dots on the chart.

The distortion then ran in reverse. As low-wage workers were rehired in 2021, they pulled the average back down, and because April 2020's inflated figure became the comparison point, average hourly earnings growth fell to 0.6% in April 2021. By 2022 the two measures were telling the same story again, both around 5%.

The Fed's own economists make the point directly: average hourly earnings growth "rose rather than fell, despite a significant drop in labor demand," while the ECI was less affected. The lesson applies to any average: check who is in it.