What happened to the median wage in 2020? : The power of the composition effect

Our first FRED graph traces the evolution of the median weekly wage in the United States. See the spike in 2020? Does this huge increase mean everyone got a huge raise? No, it does not. As we’ll try to show in this post, the so-called composition effect is misleading us here.
We’ve discussed the composition effect before, which is basically that group averages can mask true individual experiences.

Our second graph shows employment for various education levels, excluding non-salaried workers: We see that more education made it less likely to lose a job in 2020.
The third graph shows the number of employed people by education, including non-salaried workers: All categories decreased, but the decreases were disproportionally larger for the less educated.

The second and third graphs show us where that composition effect kicks in: After losing more low-wage jobs than high-wage jobs, the median wage had to go up. Remember: With a median,

Federal Reserve Source

Author: RealEstate