Contrary to other economic indicators that paint a picture of a tepid recovery, California wages made substantial gains in 2010, particularly at the end of the year. After falling in 2009, the state’s wages began 2010 with a loss in the first quarter. This was reversed in subsequent quarters and 2010 ended with a strong surge in the final quarter—rising $25.5 billion, or 17 percent, from the third quarter, on a nominal not-seasonally-adjusted basis.
The details of this surge, particularly with regard to wage rates, reveal much about the nature of the current recovery and the strengths of the California economy. Several of California’s strongest industries fared well in 2010, which apparently led many companies to dole out substantial wage hikes—much of it in the form of bonuses and stock options—to existing employees and partners rather than increase their payrolls with new permanent employees. The fact that the surge stemmed from factors such as growing high-tech exports, booming Silicon Valley investment activity, strong stock market gains, and high oil prices invites a question about its sustainability. The future of several key sectors, particularly those related to California’s high-technology specialties, will determine whether these gains can be counted on again in upcoming years. If these gains are sustainable, it raises the possibility that these prosperous firms may, in the near future, turn their focus from retaining personnel with generous paychecks to expanding their workforces.
- The year-end wage growth was very concentrated; seven industry sectors that employ about one-third (37 percent) of private sector employees accounted for two-thirds (67 percent) of total private wage growth.
- Compensation such as bonuses and stock options likely accounted for over 30 percent of total fourth-quarter wage gains.
- Wage growth was concentrated in the state’s highest-paying sectors—those whose average wage rates were 2 to 3 times the wage rates of other sectors.
ES-202 WAGE DATA
The best source of information on the latest trends in wage compensation is the Bureau of Labor Statistics’ ES-202 program (or the Quarterly Census of Employment and Wages Program). It produces detailed wage and employment data derived from quarterly tax reports submitted to state employment agencies, such as the California Employment Development Department, by employers subject to state unemployment insurance laws. These reports nearly constitute a complete census of monthly employment and quarterly wage information. Employment data represents the number of covered workers who worked during, or received pay for, the pay period including the 12th of each month. Reported wages include gross wages and salaries, bonuses, stock options, tips and other gratuities, and the value of meals and lodging, where supplied.
This data can be broken down by industry. The ES-202 program uses the North American Industrial Classification System (NAICS) to classify employers. A 6-digit NAICS code is assigned to each establishment based on a description provided by the employer. If an employer conducts different activities at various establishments or installations, separate industrial codes are assigned, to the extent possible, to each establishment.
The ES-202 information can also provide insights about levels of wage compensation in addition to their industry distribution. The total wages paid in each quarter can be divided by the average quarterly employment to derive the average wage rate paid within an industry which can differentiate between high, average and low-wage industries. Additionally, the quarterly pattern of an industry’s average wage rate leads to inferences about the prevalence of lump sum or performance-based compensation that is paid in the form of bonuses and stock options. A substantial one-quarter spike in average wage rates is an indicator of these types of payments. This inference is even stronger if the spikes recur regularly on a seasonal basis, especially in the first or fourth quarters of each year.
4th QUARTER WAGE GROWTH WAS VERY CONCENTRATED
Three high-wage industry sectors achieved explosive average wage growth in the last quarter of 2010; Computer and Electronic Manufacturing, Finance and Insurance, and Professional, Scientific and Technical Services. These sectors accounted for significantly outsized shares of the gains in the 4th quarter—44 percent of overall private wage growth.
Four other high-wage industries made smaller, but still major contributions and achieved exceptionally strong average wage growth. All together, Mining, Information, Management of Companies, and Health Care and Social Assistance accounted for 22 percent of the total wage growth.
These seven industries, then, accounted for two-thirds of the overall wage gains made in the fourth quarter of 2010. These industries employ approximately 37 percent of private sector employees statewide. Additionally, since wage growth is seldom evenly spread throughout a company, this probably dramatically understates how concentrated these wage gains were.
Within these seven major industry sectors, wage growth was often dominated by a few leading subsectors (defined by 6-digit NAICS categories).
Silicon Valley led the way – Almost half of the gains in Electronics Manufacturing were in Electronic Computer Manufacturing. Strong growth also occurred in Semiconductor Manufacturing and Instrument Manufacturing. These three subsectors by themselves accounted for eight percent of total wage growth at the end of 2010.
Wage growth in the three electronics manufacturing subsectors was likely driven by strong growth and rising profits among Silicon Valley companies and by booming investment activity. The 150 largest Silicon Valley corporations had a net profit margin of 15.6 percent—the strongest profits since 1985. Their combined stock market value reached $1.55 trillion in March 2011, up 11.4 percent from a year earlier.
Booming export activity was also an important part of component of this sector’s growth. 2010 was a banner year for California-made exports with the total value rising 19 percent from 2009. This export boom was dominated by computer, electronics, and electronic machinery, which accounted for over 60 percent of California’s 2010 export growth.
Wage growth in these subsectors at the end of 2010 was extraordinarily strong and was likely driven by healthy stock option and bonus activity. The average wage paid in Electronic Computer Manufacturing made an extraordinary 77% leap. The wage rate in Instrument Manufacturing made a similar jump but was consistent with previous year-end rates—a strong indication of annual incentive based compensation. The average wage in Semiconductor Manufacturing also increased, but not as dramatically.
The financial sector did well – Within the Finance and Insurance sector, there were extraordinary wage gains in the Investment and Securities subsectors. Nearly a third of the wage growth occurred in the Investment Advice subsector. The Investment Advice gains were particularly striking and appear consistent with year-end spikes, although the 2010 gain was significantly higher. This very likely involved a considerable level of stock option and bonus income.
Other leading growth subsectors included in Commercial Banking, Securities Brokerage, and Portfolio Management. The average wages paid in these areas also followed an annual pattern strongly indicative of healthy stock option and bonus payments. Also, the full year total and average wages paid in 2010 were much stronger than in 2009. The average wage pattern indicates that annual incentive payments in Banking and Securities Brokerage take place early in the year. In 2010, however, the pattern was unusual in that average wages jumped in the second quarter as well. Both sectors also made unusual average wage gains in the fourth quarter of 2010.
Professional service wages surge – Professional, Scientific, and Technical Services is a very broad industry. It encompasses a vast array of services including legal, architectural, accounting, computer programming, consulting, research, and public relations. Well over half of the wage growth in this sector was accounted for by legal, engineering, computer programming, and scientific research services.
Wage gains were led by Lawyers Offices, which accounted for nearly one-quarter of the sector’s total gains. The average wage pattern is consistent with a high level of fourth-quarter stock option and bonus compensation.
Total wage growth in Engineering Services was also substantial and accounted for about 14 percent of this sector’s wage growth. The average wage made an unusually strong jump—up 15 percent from the end of 2009—and was consistent with year-end bonus/stock option activity.
Total wages paid in Custom Computer Programming in the fourth quarter of 2010 jumped 17 percent from the preceding quarter and were likely related to improved business activity in the state’s various high-technology sectors. The average wage rose 15 percent from the 3rd quarter and was up 11 percent from a year earlier. The average wage pattern in this subsector indicates that stock option and bonus payments are normally spread between the 1st and 4th quarters of each year.
Wages in Research and Development in the Physical, Engineering, and Life Sciences jumped 20 percent in the 4th quarter of 2010. The average wage pattern follows an early-year bonus pattern with spikes in the first quarter of each year. However, in 2010 there was strong average wage growth in 1st, 2nd and 4th quarters. The average wage in the 4th quarter was up 20 percent from a year earlier. Total wages paid in all of 2010 were up 19 percent from 2009.
High oil prices spur wage growth – Essentially all of the gains in Mining came from Crude Petroleum and Natural Gas Extraction whose average wage nearly doubled in the final quarter of 2010. Total wages for the year as a whole were up 29 percent from 2009. These gains were likely tied to a strong rise in oil and gas prices in 2010 which boosted oil company profits.
A boost from motion pictures – Almost all—94 percent—of the wage growth in the Information sector occurred in Motion Picture and Video Production. The average wage pattern in this subsector follows a consistent pattern that indicates strong year-end stock option and bonus income. The 2010 year-end average wage was up sharply—59 percent—on a year-over basis.
This growth was likely driven by a strong 2010 box office performance. Total theater revenues were up 8 percent from 2009 which was the result of increased international ticket sales and increased domestic ticket prices that resulted from increased premium screening (3D) attendance.
Unusual headquarters wage growth – More than 90 percent of the wage gains in Management of Companies and Enterprises came from Corporate, Subsidiary, and Regional Managing Offices. This subsector comprises private company headquarters facilities that perform functions such as, management, administration, and strategic and organizational planning.
Similar to the banking sector, it appears that even though bonus payments typically take place at the beginning of each year, in 2010 average wages spiked in the both the first and second quarters. There was also a strong average wage surge in the fourth quarter—up 14 percent year-over-year.
Job growth accompanies wage growth in healthcare – Gains in Health Care and Social Assistance were dominated by Physicians Offices and HMO Medical Centers that accounted for almost 80 percent of the growth at the end of 2010. The average wage pattern strongly indicates consistent year-end stock option and bonus activity. In contrast to the sectors discussed above, employment growth made a much stronger contribution to total wage growth—the average wage paid in the fourth quarter of 2010 rose less than 2 percent from a year earlier.
4th quarter wage gains were driven by bonuses and stock options – There is no reliable way to accurately estimate how much of the fourth quarter wage growth came in the form of stock options or bonuses. However, based on the pattern of average wages noted above, it is safe to assume that they accounted for a very large share of the fourth-quarter growth.
To get a rough estimate, underlying wages can be estimated by multiplying employment in each subsector in the fourth quarter by the average wage paid in preceding quarter, which presumably reflected limited stock option/bonus payments. Subtracting this from actual fourth-quarter wages presumably reflects bonus/option payments or other special compensation. Based on this calculation, stock option and bonus payments in the subsectors described above totaled $10.2 billion. This likely understates overall option/bonus income since this only includes these subsectors. Undoubtedly, similar payments were made in other sectors.
Thus, one-fourth of the wages paid in these subsectors in the 4th quarter of 2010 were likely due to bonus/stock option compensation. More significantly, 40 percent of the increase in private wage payments in the fourth quarter came in this form.
Wage gains were concentrated among high wage earners – The wage growth achieved at the end of 2010 was concentrated in high-wage sectors. The average 2010 annual wage in the subsectors highlighted above ranged from $75,000 to over $275,000. Outside of these sectors, the annual average wage in 2010 was under $40,000.
Additionally, not all employees in these subsectors received, or received the same, bonus/option payments. Within individual companies, the bulk of these payments are typically awarded to upper level managers—presumably the highest paid employees. So, most of the wage growth in the fourth quarter was received by a relatively small share of the state’s private sector workforce.
At the other end of the spectrum, looking at 2010 as a whole, wage rates paid in eight major industry sectors that employ nearly half of the state’s private sector employees did not even keep pace with inflation. These sectors—Agriculture, Construction, Manufacturing (NAICS category 32), Retail Trade, Warehousing, Health Care and Social Assistance, Accommodation and Food Services, and Other Services—employ 47 percent of the state’s private sector workers. The change in wage rates in these sectors ranged from a 0.1-percent drop (Construction) to an increase of only 1.2 percent (Accommodation and Food Services). California’s CPI rose 1.3 percent in 2010.
Some of this wage growth is not likely to be repeated – Stock option and bonus compensation was a prominent part of the fourth-quarter private wage gains and is notoriously volatile. In serveral instances noted above, the growth was based on extraordinary and/or unsustainable factors. Ten percent of the fourth-quarter wage gains originated with industry sectors that may not be as generous in 2011.
- The turbulence that struck stock markets in the second half of 2011 could mean more subdued earnings in the financial sector. Indeed, in late 2011, announcements were made of impending major layoffs at some major national financial firms.
- Crude oil prices began sliding during the second half of 2011 and only modest price increases are expected over the next couple of years. This would bring a moderation in oil industry profits that could dampen wage gains in the future.
- Motion picture industry revenues and profits are notoriously erratic.
- The average wage pattern in corporate headquarters was unusually generous in the 4th quarter.
Additionally, a large share of the the gains in other growth sectors was dependent on the growth of the state’s high-technology sectors and on robust exports.
However, this means that a substantial share of 2010 wage gains appear sustainable as long as growth continues for the state’s high-technology and professional services industries. If these sectors continue to fare well in 2011 and beyond, there is a good likelihood that eventually these wage gains could translate to accelerated hiring.