Interest Rates
Fundamental Indicators • 9 min
Consumption is what makes production worthwhile in the modern economy. And people can consume only if they have the financial power. Considering that most people rely on employment to make a living, income and wage reports emerge as fundamental measures to gauge the purchasing power of the citizens of a country.
Income and Wages Reports (IWRs) are economic indicators which show the earnings of individuals or entities in each time period. Most IWRs focus on the personal income from employment and examine its relationship to the operating income of companies or the price stability in the national economy.
The purpose is to understand the viability of current economic policies by measuring how the changes in economic conditions, mainly the inflation rate, affect people’s income and ability to spend, known as purchasing power. Income refers to all value payments received by a person or an entity in a timeframe. The income of a company or an organisation is known as operating income, while an individual’s income is referred as personal income. A wage is a form of personal income referring to the hourly pay rate earned in exchange for labour or service. A variety of factors can affect employee wages: economic conditions and policies like inflation rate and currency strength; sectoral conditions and practices like corporate profits and labour market supply/demand; and a worker’s skills, experience, and potential.
As in most employment-related reports, the data scope of IWRs can be nation-wide or specific to industries. Income levels of the sample group are broken down to different demographics such as age group, gender, socioeconomic status, and ethnicity. Insights on demographics can reveal whether a trend is a general phenomenon or limited to a specific group in the population.
In everyday life, the income on paper usually refers to the gross amount which the buyer or employer will pay, and deducting the expenses incurred by the seller or employee yields the net earnings.
In economic analysis, the true economic value of the nominal gross or net figure is calculated with inflation adjustments. The real figure shows the amount which the nominal income would be equivalent to in the pre-inflation conditions. The real figure is typically lower than the nominal figure.
There are three common price index measures to calculate the inflation factor: Consumer Price Index (CPI), PCE Price Index, and GDP Price Index. They yield similar results and can be used interchangeably depending on the analysis.
GI = Personal Remuneration + Trade Revenue + Investment Returns
GW = (Hourly Pay Rate) x (Hours Worked)
NI (or NW) = GI (or GW) – All Taxes and Expenses
(a) ReI = NoI – (NoI x Inflation Rate)
Real wage is calculated using the same formulas by replacing nominal income with nominal wage.
Income and Wage Reports are lagging economic indicators and their retrospective data inform how the progress in other key indicators reflect to the local consumers.
Since consumer spending fuels economic activity, sustaining consumption trends is imperative to continued growth when conditions shift. This is achieved by maintaining purchasing power via stimulating the wage growth vs inflation.
Under normal circumstances, expansionary policies inflate consumer prices and increase the cost of living. People spend a larger portion of their personal income to meet their basic needs and have fewer extra cash for discretionary purchases, investments, and other spending habits.
For most people, their purchasing power is based on personal income from employment. As such, to maintain their living standards, employees will demand higher wages and salaries.
The key function of IWRs is to monitor the progress of the wage growth rate. If wage growth has a strong positive correlation with the inflation rate, then the purchasing power matches the rising cost of living, and the growth strategy is sustainable. However, if the income and wage levels remain unchanged, the consumption activity would slow down, and the country might move towards an economic recession.
On the other hand, rapid wage growth requires companies to allocate more capital to their workforce, at the cost of reducing investments to expand and scale their business. To remain profitable, they would need to scale down the workforce or cut the working hours. As a result, the unemployment rate rises amid inflated consumer prices. Less financial security decreases spending and leads to an economic crisis.
Average Hourly Wages (AHW) is one of the prominent types of income and wages reports. Each country publishes a variation of this report with a slightly different name. The commonly used OECD formula to calculate average wages is as follows:
Average Hourly Wage = (Average Total Wage) x (AWH Ratio)
OECD categorises wages as low, regular, and high pays. The Low-pay workforce includes the people who earn less than two-thirds of the median wage of their country, while high-pay workers earn more than one-and-a-half times the median pay figure.
Income and Wages Reports indicate the consumption power that underlying corporate profits and general economic growth. Therefore, IWRs like Average Hourly Wages inform investors and traders when making fundamental analyses to determine the long-term direction of the trend.
The market sentiment usually calms down in the hours building up to the purchasing power report.
Let’s say the U.S. Average Hourly Earnings report will be published on the first Friday of the month. If the results are positive and expected, the U.S. Dollar and American stocks and indices rise, while safe-haven assets like Gold and bonds drop. If the results are negative and expected, the market reaction will be reversed. However, a surprising outcome, like a decline in wages when a hike was expected, can cause market turmoil with extreme volatility across the board.
Income and Wages reports show the economic strength of a nation. Its citizens’ purchasing power drives the economic activity and fuels growth. As such, the national currency and stock markets are dependent on domestic demand.
Whether the wages will grow or decline, preparing your portfolio for IWRs with AvaTrade’s intelligent trading tools can help greatly to take positions in advance.
By knowing how purchasing power determines consumer behavior, you can analyze the future of economies with confidence. Adjust your trading strategy with your new wisdom and start expanding your income potential!
There are a number of factors that have an influence on the labour market, and by connection the income and wages in a given country. Chief among them is supply and demand. When there is a large supply of willing workers’ wages can remain stagnant since employers don’t need to raise wages to provide an incentive to attract workers. Conversely when the supply of workers is low and demand is high wages and income can rise rapidly. This can also lead to price inflation, which can cause central banks to raise interest rates, stifling economic growth
There are a number of factors that can cause wages to rise or fall. Over the long term the most important of these are productivity and inflation. Productivity increases are primarily a function of technological improvements, and that keeps them mostly out of the control of bankers, governments and markets. Inflation is directly influenced by central banks and monetary policy. That means wage growth is also indirectly influenced by central bank monetary policy. While some degree of wage growth is good, too much wage growth can cause excess inflation. This makes controlling wage growth a balancing act in many economies, where the primary focus of central banks is on economic growth and price stability.
Stagnant wage growth seems like it would be a good thing for businesses, but the opposite is true. When wage growth is stagnant businesses find it difficult to attract and retain talented workers. That makes it difficult for the businesses to perform well. In addition, the financial stress caused by stagnant wages can lower the productivity of workers. Taken together this can have a serious impact on business growth. That’s why wage and income growth statistics are so important for markets. When wages aren’t growing traders can view it as a negative for economic growth overall, and for the future growth of businesses and stock prices
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