Are Increasing Retirements Suppressing Oregon’s Average Wage Growth?December 20, 2018 When unemployment levels are low, we typically expect to see strong wage gains as businesses must hire from a diminishing pool of labor. At this point in the business cycle we would typically expect to see nominal wage gains of around 3 percent to 4 percent annually. However, here in Oregon wage gains are largely slowing down. Average hourly earnings of private-sector workers are up by around 2 percent from this time last year, significantly slower wage growth than we saw back in 2017 and 2016. Quarterly average wages from payroll tax records show a similar trend, with the most recent quarter (second quarter 2018) showing wages up around 2.7 percent from last year. Unemployment levels remain at or near historically low levels across the state, making it difficult for businesses to find qualified workers. During these conditions we expect to see an acceleration of wage gains rather than the slowdown seen this past year.
One possible reason given for this slow wage growth has been the aging of the workforce resulting in an acceleration of retirements from workers in higher income brackets. The story goes that as high-wage workers retire, the aggregate average wage drops due to those replacing the retirees filling those roles at a lower wage. Are workers retiring out of the workforce suppressing gains in the average wage here in Oregon?
Using data from the U.S. Census Bureau’s Longitudinal Employer-Household Dynamics (LEHD) program, we can track older workers in Oregon. In particular, we can track wages for those who are exiting the workforce. Workers 55 years and older tend to have a negative net hire rate, meaning there are more separations each year than hires.
Presumably, many of these separations are due to retirement. In fact, there has been an acceleration of separations for workers 55 and older as the large baby boomer generation reaches retirement age. That’s our first hint that it is at least plausible that retiring workers are suppressing growth in the average wage.
Oregon workers 55 and older who separated from the workforce were isolated in the LEHD dataset. As a reminder, a separation is when a firm stops reporting wages for a worker. It’s a fair guess that the majority of these separations are retirements, although a portion could be people moving out of the state, becoming self-employed, becoming unemployed, or dying. Over the past two years, Oregon averaged 22,600 separations each quarter for workers 55 and older. The average quarterly payroll for these separations was around $79 million. Finally, the average monthly wage for these separating workers ages 55 and over (~$3,450) was slightly higher than the average wage for all workers (~$3,396).
What happens to the aggregate average wage for all workers when we take out the separations of workers 55 and older? The average wage drops. That being said, the effect is relatively small. As a reminder, the average monthly wage of all workers over the past two years was around $3,396. When accounting for the wages lost from separations of workers 55 and older, the average monthly wage dropped to $3,392. The result was a drop in the average monthly wage of $4, which equates to a loss of just 0.11 percent. Based on this data, retiring workers are pulling down aggregate wages, however their impact is relatively minor and likely not the main driver behind the slower-than-expected wage gains.
Although the impact on the aggregate average wage of older workers separating from the workforce is small, that impact does seem to be increasing. During the recession, back in 2009 and 2010, older workers separating from the workforce had essentially no impact on the average monthly wage. However, over the past several years these older workers leaving the workforce resulted in a more consistent and increasingly negative impact on the average monthly wage. The increasing effect of retiring workers on the average wage is likely the impact of an acceleration of 55+ separations. Around 23,000 older workers left the workforce in the most recent quarter (Q2 2017) compared with just under 20,000 three years ago. There are nearly 3,400 additional separations from older workers today, a 17 percent increase in only three years.
Despite the increasing number of separations from older workers, the overall workforce continues to grow. Oregon continues to draw new residents into the workforce from in-migration and a strong job market. Older workers separating from the workforce make up around 1.3 percent of all workers today, which is only slightly higher than their share back in 2010 (1.1%). The rapid growth in the workforce, particularly from the prime working-age population, is helping to lessen the impact retiring workers have on the aggregate wage.
The relatively small impact retiring workers have on the average wage is likely due to their replacements making a comparable wage. The assumption is that retiring workers, presumably at the peak of their earnings, are replaced by lower-wage workers. Could the difference between the retiring worker and their replacement be less significant than previously thought? Based on LEHD data, earnings in Oregon are highest among the 45 to 54 age group, not those of retirement age. This is a consistent trend; that age group also posted the highest average monthly earnings back in 2010. In fact, earnings of the 55 to 64 age group are nearly identical to the 35 to 44 age group. This calls into question the assumption that retiring workers are at their peak earnings and that younger workers make significantly lower wages. Additionally, in the context of today’s tight labor market and high demand for labor, businesses need to offer competitive wages to those replacing the retiring workers.
Regardless of why wage growth in Oregon has been slowing we can rule retirees out as being the sole driver. Yes, increased retirements have an effect on aggregate wages, but that effect remains relatively small.