What is an Average Earnings Index?

An average earnings index is a way to measure how much money people make in a country over time. It looks at the typical amount that workers earn. The index shows if wages are going up or down compared to the past.

Why is an average earnings index useful?

An average earnings index helps us understand changes in people’s incomes. When earnings go up, it usually means the economy is doing well. People have more money to spend on things they want and need, and businesses sell more and can hire more workers.

But it can be a warning sign if average earnings stay the same or go down. Maybe companies are struggling. They might not be able to pay workers as much. Or maybe prices for food, housing, and other basics are increasing faster than wages. This makes it harder for people to afford what they need.

Governments and economists use average earnings indexes to track the economy’s health. Central banks consider them when deciding on interest rates and other policies that impact everyone. Businesses use earnings data to determine salaries and budgets.

How is an average earnings index calculated?

An average earnings index doesn’t look at the pay of every worker—that would take way too long! Instead, it uses a sample of businesses and workers representing the whole economy.

Government agencies collect data from these companies on how much they pay employees. This usually happens every month or quarter. They gather payroll records and surveys, breaking down wages by industry, job type, hours worked, etc.

The agencies take this raw pay data and find the average earnings. But there’s more to it than just a simple average. The index needs to be adjusted for a few things:

Inflation eats away at the value of earnings over time. What you could buy with $100 last year now costs more than $100. The index has to account for rising prices. Agencies use complex equations for this based on the Consumer Price Index and other measures of inflation. This “real earnings” data shows the true earning power of wages.

The agencies also have to adjust for changes in the types of jobs people do. Maybe manufacturing jobs with good pay are disappearing while service jobs are growing. However, those service jobs might have lower wages on average. Just looking at the unadjusted average earnings could be misleading. Economists have ways to compare apples to apples and oranges to oranges in the data.

The result is an index with a base value 100 set to a certain year. So if average real earnings have gone up 10% since the base year, the index would be 110. Looking at the index value over many years shows the trend in earnings.

Different types of average earnings indexes

You might see a few types of indexes talked about:

The Average Weekly Earnings (AWE) index breaks down earnings per week. Useful for comparing pay across different kinds of jobs and schedules. But doesn’t tell you as much about a worker’s total income.

The Average Hourly Earnings (AHE) index looks at wages per hour worked. It is better for getting a sense of pay rates without things like overtime skewing the numbers and for comparing earnings across industries. However, salaried workers’ earnings are harder to break down by hour.

Indexes might focus only on private sector workers or include government jobs too—some drill down into more detail on earnings by age, race, gender, etc.

Global average earnings indexes

There isn’t a single earnings index that covers the whole world. Different countries have their own ways of measuring, and data isn’t always collected the same way across borders.

However, groups like the Organisation for Economic Co-operation and Development (OECD) collect data to compare earnings in different countries. They look at average annual wages, how earnings compare to the cost of living, gender wage gaps, and low vs. high-paying jobs.

This helps spot global trends and shows how economies stack up. You can see which countries’ workers are getting ahead and which are struggling. Governments can learn from policies in places where earnings are rising.

Limits of average earnings indexes

Average earnings indexes are a key economic indicator. But they don’t show the whole picture. Here are a few important things to keep in mind:

Averages hide a lot of detail. If low-wage workers’ pay goes up but high-earners pay goes up much more the average rises. But that doesn’t reflect typical workers’ situations.

Earnings are only one part of income. Investment profits, government benefits, and other factors also affect households’ finances. Two workers with the same wage might have very different standards of living.

The cost of living matters, too. If prices rise faster than earnings, workers can afford less even if their paychecks are bigger. Adjusting for inflation in the index helps show “real” earnings. However, the national inflation rate affects different people differently.

Earnings data is a bit behind the times. It takes a while to collect, process, and release the numbers. So, an index might not show what’s happening this month.

Putting average earnings indexes in context

Average earnings are just one piece of the economic puzzle. Other indicators, such as unemployment rates, GDP growth, income inequality statistics, and poverty measures, help flesh out the story.

For example, falling unemployment and rising earnings are usually good news. But maybe more people are working part-time or gig jobs because they can’t find full-time work. An average earnings index alone won’t capture that nuance.

Or if a few people’s earnings are skyrocketing while most people’s wages are flat, an average might not show the inequality. The index is powerful, but no single number tells you everything.