The National Average Wage Index (NAWI) is a benchmark used as a metric of inflation – tracking wage growth among American workers. The Social Security Administration (SSA) calculates the NAWI annually, using it for two primary purposes:
To make updates to the Old Age, Survivors and Disability Insurance (OASDI) program; and
To index both insurance and retirement benefits.
The NAWI is formulated based on income that’s been subjected to federal income taxes, as well as deferred compensation plan contributions.
It’s important to note that the NAWI is computed to specifically make updates to Social Security benefits an individual is entitled to receive. In order to accomplish it (and be certain that an individual is taxed properly), an individual’s wages aren’t indexed with the NAWI for computing benefits until they turn 60 years old.
The National Average Wage Index (NAWI) tracks wage growth and trends and is useful in helping to determine if inflation is trending up or down.
The NAWI is critical in helping to determine how much an individual will receive in Social Security benefits upon his or her retirement.
Understanding wage trends and the state of inflation is important for policymakers, such as the Federal Reserve.
Why the NAWI Is Important
The National Average Wage Index acts as an important measure of inflation. By indexing wages, trends become visible. The trends are often useful in helping reveal wage inflation. If inflation becomes apparent, it can lead to monetary policy changes.
For example, the Federal Reserve may deem it necessary to increase interest rates to counteract inflation. Conversely, if inflation seems to be decreasing in a significant way, the Fed may stimulate the market by lowering interest rates.
Understanding the NAWI Calculation
The 2018 NAWI is calculated using the NAWI from the previous year, multiplied by the percentage of change in wages between 2017 and 2018. (It should be noted that the most recent NAWI – available on the SSA’s website – is for 2018.)
So, in order to calculate 2018’s NAWI, 2017’s NAWI of $50,321.89 must be multiplied by the percentage of change between 2017’s and 2018’s annual wages. The average wage in 2017 was $48,251.57, and the average wage in 2018 was $50,000.44. The actual calculation is given below:
The National Average Wage Index for 2018 is $52,145.80.
Wage Push Inflation
When talking about the NAWI and inflation, it’s particularly important to understand wage push inflation, as it exerts a direct effect on average wages and how they’re indexed.
Wage push inflation is inflation – which is the widespread increase in the cost of goods and services – that results from a general increase in wages. If an employer must pay his employees more, they must also then increase the cost of the goods and/or services that they provide to ensure a continuation of profits.
However, it becomes a situation of circular effect – if goods and services begin to cost more, then employers must begin to pay their employees more. As the cost of living rises, so too must the amount that individuals earn in order to survive.
Wages may also need to be increased if federal and state governments decide to increase minimum wage requirements. In order to comply, companies – specifically consumer goods companies in which wage push inflation is particularly prevalent – must increase the wages they pay their employees, either to meet the requirements or to stay competitive.
Other Measures of Inflation
While the Social Security Administration specifically uses the NAWI metric, it, and other government agencies – such as the Federal Reserve – also rely on other measures of inflation to determine monetary policy. Two other primary inflation metrics are the Consumer Price Index (CPI) and the Producer Price Index (PPI).
The Consumer Price Index tracks the cost of a basket of commonly bought goods. However, it is often criticized as an inflation metric because it excludes energy costs, which are a major expenditure for most individuals and families.
The Producer Price Index tracks inflation more at the wholesale level, rather than the retail level used by the Consumer Price Index. The PPI reflects the average prices that producers receive selling goods in the wholesale market.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
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