Average Hourly Earnings

Let’s face it and not fool ourselves. Nobody cares about the economy. What really matters to people is how much they earn. That income we can present either as an annual salary or average hourly earnings. In the US, they are calculated by the BLS as a measure of gross payrolls divided by total hours paid during a given period. As one can see in the chart below, the hourly earnings increased from about $20 in March 2006 to above $27 in November 2018.

_{Chart 1: US average hourly earnings (in $) from March 2006 to November 2018.}

The “gross” character of hourly earnings reflects not only basic hourly wage rates, but also such factors as premium pay for overtime. So, they differ from wages – also because earnings are the actual return to the worker for a stated period on average in an industry, while the latter are the amount stipulated for a given unit of work or time in a specific job. In short, they are the average amount employees make per hour in the United States in a given month.

Average Hourly Earnings and Gold

Great. But what is the link between hourly earnings and gold? Let us explain it to you. Hourly earnings provide useful information about wage inflation. And it is assumed (we abstract here whether rightly, or not) that wage inflation may, after some time, translate into consumer prices inflation. And gold is perceived as, you guessed it, a hedge against inflation (again, not necessarily correctly). Hence, the surge in hourly earnings may trigger inflationary fears and spur some demand for gold.

Second, the average hourly earnings are an important part – together with nonfarm payrolls – of the Employment Situation Report closely monitored by the Fed. This is because the US central bank uses hourly earnings in deciding about the conduct of its monetary policy, in particular whether to raise or lower interest rates. Hence, gold investors can closely watch the hourly earnings to guess the Fed’s reaction and to position themselves accordingly. For example, if the US central bank may consider the jump in hourly earnings as an indicator of inflationary pressure, and, thus, tighten its stance. Gold may struggle, then, as the yellow metal does not like higher interest rates.

Please take a look at the chart below. It presents the gold prices and the annual percentage change in the average hourly earnings since early 2007. What can we say about the relationship between the average hourly earnings and gold prices?

_{Chart 2: Average hourly earnings of all private employees (red line, left axis, % change from year ago) and gold prices (yellow line, right axis, London P.M. Fix, in $) from March 2007 to November 2018.}

Well, it seems that the impact of the Fed’s reaction is more important than inflationary expectations. What we mean is the fact that the price of gold soared when the wage dynamics plummeted during the Great Recession. And it entered the bear market, when the wage inflation started to accelerate. So, we can reject the popular belief that rising earnings are fundamentally bullish for the gold market.

Are they, thus, bearish? Well, the negative correlation at 0.75 would suggest so, but investors should remember that the Fed’s reaction changes over time, so the observed relationship may not be stable in the long-term (another problem is that our data series starts only in 2007).