ADP: Wage growth is accelerating

Wage growth is picking up more rapidly than government reports show, according to new data from top payroll processor ADP, suggesting that the economic recovery may be more robust than believed.

Hourly pay for private-sector workers was up 4.5% in the third quarter compared to a year ago, a new ADP report reveals, much higher than the 2% annual growth reported by the Bureau of Labor Statistics.

According to the BLS, wage increases have averaged 2% through most of the five-year-old recovery, barely keeping pace with inflation. The failure of hourly earnings to accelerate despite substantially stronger job growth this year has surprised economists who say stagnant pay has held back brisker consumer spending.

But the ADP data show that annual wage gains accelerated from about 2% in early 2013 to nearly 3% in last year's second quarter. Pay increases have risen steadily since.

"Wage growth is indeed meaningfully picking up," says Mark Zandi, chief economist of Moody's Analytics, which helps ADP compile its employment reports.

ADP's report likely overestimates wage growth for the entire economy, Zandi acknowledges. Its report covers 24 million employees of firms that contract with ADP to handle their payrolls. Companies that can afford ADP's services likely are doing better than US businesses overall and may be better equipped to give bigger raises, he says.

Still, Zandi says, the ADP data reflects a clear trend that should show up in government reports by early next year.

At the same time, he says, BLS figures likely have underestimated pay increases. One reason is that its survey includes earnings for management employees who aren't paid by the hour but whose hours are estimated by employers, Zandi and other economists say.

That's why some economists put more stock in BLS's tally of pay increases for production workers, who are paid hourly. That figure has shown a faster pickup in earnings gains over the past year -- 2.3% in September, down from 2.5% the previous month.

The ADP data, he says, more accurately calculates hourly earnings for all types of employees.

Another reason BLS reports slower wage growth is that it figures in overtime and certain bonus pay. That practice likely pushed wage data higher when such compensation was rising sharply a couple of years ago but it may now be holding down reported pay increases, Zandi says. ADP calculates increases in base pay only.

BLS's overall earnings figures also likely have been nudged lower by the retirement of higher-paid baby boomers and the entry into the work force of lower paid Millennials, Zandi says. ADP wage data, he says, are less sensitive to movements into and out of the labor force.

In the third quarter, ADP says, pay rose fastest, about 4.8% over the year, for financial and construction workers. Construction firms have faced a shortage of skilled workers as the housing market has recovered. Pay hikes of at least 4.2.% were broad-based across all major industries, the report says.

Wages increased the most, 4.7%, in the West, which has benefited from a stronger housing recovery, and fast-growing energy, technology and tourism sectors. Workers under 35 and those earning less than $50,000 a year also are seeing bigger raises, according to the report.

The ADP report also spotlights an increasingly dynamic job market, with 6.3% of all employees changing jobs last quarter, up from 5.8% a year ago.

"That bunker mentality is fading," Zandi says.

ADP each month releases a private-sector employment report that attempts to foreshadow the BLS's closely followed jobs survey. This marks the first time ADP has released data on employee wages and turnover.