Income and Wages Reports in Trading

Consumption is what makes production worthwhile in our modern economy. However, people can only consume if they have the financial power to do so. 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.

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What are Income and Wages Reports?

Income and Wages Reports (IWRs) are economic indicators that show the earnings of individuals or entities in each 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 organization, is known as operating income, while an individual’s income is known 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 the inflation rate and currency strength; sectoral conditions and practices like corporate profits and labour market supply/demand; and of course a worker’s skills, experience, and potential.

As in most employment-related reports, the data scope of IWRs can be nationwide 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.

How to Calculate Income and Wages?

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.

Expense-adjusted Income/Wages

  • Gross Income vs Net Income: Gross Income (GI) is the initial income amount, while Net Income (NI) is the final figure after deducting all expenses like taxes, labour, and depreciation.
  • Gross Wage vs Net Wage: Gross Wage (GW) is the hourly pay rate of the employee. When the legal deductibles like taxes are applied, the final figure yields the Net Wage (NW).

GI = Personal Remuneration + Trade Revenue + Investment Returns

GW = (Hourly Pay Rate) x (Hours Worked)

NI (or NW) = GI (or GW) – All Taxes and Expenses

Inflation-adjusted Income/Wages

  • Nominal Income vs Real Income: Nominal Income (NoI) refers to the current income amount, either gross or net. Real Income (ReI) is the inflation-adjusted figure, indicating the hypothetical cost to purchase the same goods and services in the past (before the inflation). Three different real income formulas are commonly used:
  • Nominal Wage vs Real Wage: Nominal Wage (NW) refers to the income from employment, without adjustments. Real Wage (RW) is the inflation-adjusted income, showing the relative purchasing power of the person.

(a) ReI = NoI – (NoI x Inflation Rate)

You can calculate real wage using the same formulas, by replacing nominal income with nominal wage.

Income and Wages Reports as Economic Indicators

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 less 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.

Wage Growth

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 can 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 can lead to an economic crisis.

Average Hourly Wages

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)

  • Average Total Wage = (Total Wage Account) / (Average Number of Workers in the Economy)
  • Average Working Hours (AWH) Ratio = (AWH of Full-Time Employees / AWH of All Employees)

OECD categorises wages as low, regular, and high pays. The Low-pay workforce includes those 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.

How to Trade with Income/Wages Reports?

Income and Wages Reports indicate the consumption power that underlying corporate profits and general economic growth bring. Therefore, IWRs like Average Hourly Wages inform investors and traders when making fundamental analysis 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 is to be published on the first Friday of the month. If the results are positive as expected, the U.S. Dollar and American stocks and indices are expected to rise, while safe-haven assets like Gold and bonds can tend to drop. If the results are negative and expected, the market reaction may be reversed. However, a surprising outcome, like a decline in wages when a hike was expected, can potentially cause market turmoil with extreme volatility across the board.

Key Income and Wages Reports Around the World

U.S. Average Hourly Earnings

  • Region: North America
  • Date of release: Monthly and yearly
  • Affected Assets: USD; U.S. stocks and bonds; Dow Jones, US500, US_TECH100; USD-traded commodities

E.U Average Hourly Labour Costs

  • Region: Europe
  • Date of release: Monthly and yearly
  • Affected Assets: EUR; European stocks; DAX 30, CAC 40; government bonds of EU-members

U.K. Index of Labour Costs

  • Region: Europe
  • Date of release: Quarterly
  • Affected Assets: GBP, EUR; British stocks; FTSE 100; UK Gilts

Canada Survey of Employment, Payrolls and Hours

  • Region: North America
  • Date of release: Monthly
  • Affected Assets: CAD; Canadian stocks; S&P/TSX; Canada Marketable Bonds; Crude Oil

Japan Overall Wage Income of Employees

  • Region: Asia
  • Date of release: Monthly
  • Affected Assets: JPY; Japanese stocks; Nikkei 225; Japan government bonds

China Monthly Earnings

  • Region: Asia
  • Date of release: Quarterly
  • Affected Assets: CNY, AUD, NZD; Chinese stocks; China A50; Chinese Government Bonds

Australia Wage Price Index

  • Region: Oceania, Asia
  • Date of release: Monthly, quarterly, and yearly
  • Affected Assets: AUD, NZD; Australian and New Zealand stocks and bonds; ASX 200 index

** Disclaimer – While due diligence, care and research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of trade or investment advice or recommendation and should not be construed as such.

Why Trade Income and Wages Reports with Friedberg Direct, Powered by AvaTrade Technology?

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 our intelligent trading tools can significantly help you to take positions in advance.

  • When is the IWR next release? Visit our economic calendar to see the exact dates of the key IWRs around the world.
  • Will markets go up or down? Analyse other related indicators like personal income, consumer spending, and CPI to help you determine whether to open long or short positions in your CFD trades, without having to purchase the underlying asset..
  • What if I need help? Our technical support team is happy to offer you its services via phone, live chat, or e-mail. However, please note that we are prohibited by regulations from providing any kind of personal outlook comments and opinions, trading advice or recommendations.

By knowing how purchasing power determines consumer behaviour, you can analyse the future of economies with confidence. Adjust your trading strategy with your new wisdom and start expanding your income potential!

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