May 4, 2019

The mystery of sluggish wages

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Reproduced from a chart by Joseph Brusuelas; Chart: Axios Visuals

The U.S. economy is confounding: Three months from the longest expansion since such data began being tracked 170 years ago, the economy keeps pumping out strong job growth, and has now pushed down unemployment to a 50-year low.

Yes but: It is delivering only middling wage growth, lower for instance than the last expansion in the 2000s. That has been an enduring mystery, especially amid month after month of ultra-low jobless figures over the last year.

What's happening: In its latest report, the Labor Department said April joblessness was at a drum-tight 3.6%, the lowest since 1969. Normally, such a number would be considered well below "full employment," considering how many people change jobs as a matter of course. But in the current expansion, government and private economists say there is room yet for jobs to get even tighter.

  • The presumed continued slack in the economy may explain why wages grew just 3.2% in April.
  • That's double the approximately 1.6% inflation rate over the last year, providing workers a real gain. But economists point out that wages routinely grew by more than 4% on an annual basis during the expansion in the 2000s.
  • Joseph Brusuelas, chief economist at RSM (whose numbers are behind the chart above), said that such low monthly jobless figures should deliver greater wage gains. "Nominal wage growth is modest at best compared to previous business cycles late in the expansion."

This does not mean economists were unhappy with Friday's jobs report: On the contrary, they were mostly elated by the 263,000 jobs created in April, higher than expected. They also by and large treated the wage gain as something to crow about.

  • But this is because economists are largely trained to look at wage gains as a key contributor to inflation, which they regard as the No. 1 thing to guard against.
  • Very few economists treat the greater ability of workers to buy goods and services as a fundamental measure of economic health.

The political environment is starting to change that: Decades of largely flat wages and the loss of economic stature across U.S. cities and counties are thought to be a contributing factor in widespread alienation and institutional mistrust. That inflation does not appear to be taking off is also making economists more comfortable with strong wage gains.

Andrew Chamberlain, chief economist at Glassdoor, says that economic conditions are an argument for the Fed to keep interest rates flat and not tighten them. "The Fed should let the economy burn hot," he tells Axios. "This is one of those times historically where workers at the bottom can win gains."

  • Wage growth for the lowest-paying jobs are seeing the highest gains. Detailed figures are available only up to March. But in the first quarter, the lowest quartile saw a 4.4% wage increase year on year.
  • Among the steepest gains have been bartenders (a 9.6% increase on average over the last year) and retail cashiers and bank tellers (both 4.6%).

A red flag: In the first few months of the year, job listings are usually up at Glassdoor, but Chamberlain says that this year they are down. This contradicts the narrative of continued job growth, and could suggest a slower pace ahead. "It definitely shows that there has been some hesitation by some employers to hire," he said.

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