The September issue of Fannie Mae's Housing Insights says little specific about housing, focusing instead on changes in average and aggregate earnings during the last five business cycles. Fannie Mae's economists use a decomposition method to disentangle effects of employment changes within industries (the "employment effect") and average earnings growth within industries) the "earnings effect") on aggregate wage trends.
The analysis found that the massive job losses during the Great Recession (December 2007 to June 2009) followed by a slow and choppy recovery would be expected to have suppressed wage gains more than in earlier business downturns. In fact, the analysis finds that real average earnings started to grow during the recession, surpassing the level at the beginning of the recession and remaining above that level after three years of recovery and are now 2.9 percent greater than at the start of the recession. By contrast, real average earnings during the same period in the previous four recoveries remained below, or at best stayed about even with levels at the beginning of the associated recession.
However, real aggregate earnings summed across all employees tell a very different story than average earnings per employee. Real aggregate earnings are still 0.9 percent below the pre-recession level whereas at the same stage in recovery aggregate earnings were 2 to 3 percent higher in three earlier recessions and were substantially the same during the recovery from the 2000 cycle. The 1970's recession is a particularly strong contrast as aggregate wages fell 11.2 percent but came back so strongly that three years after the recession they had increased 2.9 percent.
Aggregate earnings have recovered so slowly because net job losses have more than counteracted per-employee wage gains as private employment remains down 3.5 million from the beginning of the Great Recession.
A simple analysis does not quantify the relative effects of employment and earnings on aggregate earnings. Decomposition analysis reveals that real aggregate weekly earnings decreased by $3.572 billion during the Great Recession. This was the net result of $4.727 billion in wage losses due to the employment effect - at least twice as large as in the preceding four recessions) and $1.156 billion in wage gains from the earnings effect. In other words, the sharp decline in aggregate earnings was completely attributable to job losses that were only partially offset by continued average wage increases for those who remained employed. Job losses during the Great Recession were 6.8 percent of pre-recession employment compared with losses of 1.5 to 3.7 percent in previous recessions.
Since the recession ended, real aggregate weekly earnings have only partially recovered, increasing by $3.155 billion of which the earnings effect accounted for $1.344 billion (43 percent) and the employment effect for $1.811 billion or 57 percent of the change.
Construction was especially hard hit. When industrial sectors are examined, construction stands out as having suffered the greatest loss in aggregate earnings, $1.092 billion. Furthermore, it was the loss of construction jobs, not any substantial change in average construction wages that caused the large decline in aggregate earnings within this sector. Information services is the only other sector in which ongoing job losses have continued to detract significantly from aggregate wage growth and the employment effect is much smaller - -$96 million per week. Construction employment had an effect that was at least two-thirds greater than in earlier cycles and, where construction employment increased during the first three years of earlier recoveries it dropped during the same period in the Great Recession, losing nearly $400 million from aggregate earnings since June 2009.
Earnings are a primary force behind economic growth and the report shows that job loss is the primary driver of average wage decline. As construction job losses are shown to be the primary force behind this business cycle's comparatively weak aggregate earnings performance, Fannie Mae's economists say that it "may take years before housing activity rebounds to levels typically associated with robust construction employment gains. Because of this, Housing Insights states "we believe it is likely that we will experience a gradual, sub-par economic expansion."