Shifting Mix is Often Ignored as the Reason Behind A Shifting Mean
I have written about this mix effect many times, eg here. Imagine a corporate division that sells tables and chairs. The CEO is reviewing this division's performance, and sees that their revenues are increasing but their profit margin is falling. He asks his analyst to look into it - is it the tables or the chairs or both that are showing falling margins. Our poor harassed analyst comes back and says, uh, neither. The profit margins for both tables and chairs went up last year. Well, the CEO asks, if revenues are up and all their component margins are going up, how is their total margin falling? It turns out that tables make a much higher margin than chairs, and over the last year the company has seen a much higher growth in chair sales than table sales. The mix is shifting towards a lower margin product and is bringing the averages down. By the way, I can say with authority that this conversation is much harder when the analyst is yours truly and the CEO is famed tough (but talented) boss Chuck Knight of Emerson Electric.
Whether the media mentions this effect or not, it is happening all the time. Here is an example from the WSJ:
One mystery of this economic expansion is that wage growth has remained slow even as the labor market has finally tightened. One widely cited culprit is historically low productivity growth. But a new analysis from the Federal Reserve Bank of San Francisco adds a more optimistic, albeit paradoxical, explanation.
The Bureau of Labor Statistics recently reported that median weekly earnings had risen in July by a healthy 4.2% on an annual basis, the fastest growth in a decade. As labor markets tighten, employers typically increase wages. Until this past year, however, median weekly earnings growth had hovered near 2%, which is significantly less than the 3.25% average from 1983 to 2015.
So why haven’t wages risen faster amid an increase in hiring and unfilled jobs? One answer is that wages have actually been growing at a faster clip—around 4% to 5%—at least for full-time workers with steady jobs. But new full-time workers who are generally paid less than the retirees they replace are dragging down the average wage increase.
Researchers at the San Francisco Fed this week updated their 2016 paper that disaggregated the wages of full-time workers with steady employment from recent entrants—that is, new workers or those returning to full-time work. Their earlier analysis showed that average wage growth had slowed less than expected during the recession while staying relatively flat during the recovery.
That’s because workers who lost jobs during the recession were generally lower skilled and lower paid, so average weekly wages didn’t fall significantly. However, many of those workers have since been rehired at below-average wages, which has depressed the aggregate.
In prior expansions, wage growth has been driven mostly by continuously full-time employed workers, and the researchers find that’s still the case. Wage growth for these workers is now close to the pre-recession 2007 peak. But there are now many more workers who have been on the labor-force sidelines who are moving to full-time employment, thus creating a drag on wages.
This is frequently how mix shifts play out in the news. Notice that there are actually two pieces of good news here: 1. Wages for full-time workers who have been employed for a while are growing well and 2. lower-skilled and less experienced workers who left the labor force are now getting jobs and returning to work. However, when these are combined, the net is portrayed as bad news, ie wage growth in the US is sluggish. Because the mix was ignored.
