Why Wages Are Not Rising Much in a 4.3 Percent Unemployment Rate Environment

Have you ever read an email that contained a link that was literally made for you, that you just had to click?  [Naturally from a known-source that you have no concerns regarding cybersecurity.]   I had one yesterday and, wow, did it increase the level of my brain activity level.  Here was the hook, and it was from a daily push from MarketWatch:

Here’s why Americans are missing out on a big payday

An economist simply must take the bait.  The gist of the article was simply, “Why, in a 16-year low unemployment-rate environment, are wages not climbing briskly?“  The answer was also straight-forward, “Worker productivity is barely growing, so why pay more?”

Let’s start at the top of the pay pyramid.   Jobs are everything to an economy.  Period.   Good news is that the U.S. added 2.1 million and change net new jobs in the past 12 months, with the latest four months on a 2.4 million annualized run.   Bad news is that in February 2015 the U.S. added more than 3.1 million.   So job growth is tepid at best.   The following graph shows the total number of jobs monthly since January 2007 on a seasonally adjusted annualized basis.   As I have been saying since mid-2014, the U.S. has more jobs than any time in history.

8-8-17a graph1

Next is the measure of people still in the workforce wanting jobs that do not have jobs today – contained in the metric called the Unemployment Rate.  At first glance the unemployment rate would strongly support the case for escalating wages.  After all, the Federal Reserve defines full employment when the unemployment rate is in the 5.0 to 5.5 percent range.   Currently at 4.3 percent, it is tied at the lowest level seen in the past 16 years, as shown in the following graph.  That statistic alone screams rising wages.

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The next graph shows the total workforce aged 16 and up (seasonally adjusted), with the major subset being those within the workforce having jobs.  Again this would lead one to believe that wage wise, people should be really banking strong incomes given the relatively few in the workforce without jobs.

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Now take a look at the number of job openings.  There were almost 5.7 million available jobs at the end of May 2017 (latest data available) across the U.S. according to the Bureau of Labor Statistics, almost near the all-time record high hit in July 2016.  The number of available jobs are shown in the following graph.  Again this supports the hypothesis that wage growth should be robust.   The just reported job openings for June 2017 rocketed to 6.2 million – an all-time record.

8-8-17a graph4

The U.S. Labor Force is defined as the number of people willing and able to work.  The labor force participation rate is the percentage of the population that is either working or seeking work.  As shown in the graph below, the Labor Force Participation Rate is slowly coming off of the bottom hit in 2017, but remains historically low.

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There is more bad news remaining.  Many people that have not yet retired have given up on the job search believing there are no jobs out there for them.  They are reclassified into the segment of Not in the Labor Force.  These are people that do not have a job nor are they actively seeking one.  The next graph shows the significant increase in this classification.  This category increased by 16 million people from January 2008 to date.  As the economy improves, some of these individuals will re-enter the labor force.  In those months, while there will be strong job growth, surprisingly at the same time unemployment rates may trickle up as these prior workers once again commence looking for a job.

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These factors pretty much explains tepid salary growth.   But as they say on TV in the infomercials, Wait, There’s More!

The final issue is lack of productivity gains.  Imagine an individual that is being paid $1 to make each widget.  Regardless how much the widget maker desires to earn, if they continue to make the same number of widgets each day, their salary remains constant.   The following graph shows the gains in labor productivity since 1990 (annualized).  The current pace in growth in productivity is barely above zero.

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Just like the widget maker, salary levels are pretty much flat.  The following graph shows the average hourly earnings, seasonally adjusted, since 2007.

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In the latest 12-months ending July 2017, the average hourly wage rose 2.5 percent to $26.36 (not inflation adjusted).    The latest Consumer Price Index (all urban consumers, seasonally adjusted) is up 1.65 percent in the latest 12 months.   Labor productivity was up 1.2 percent year-over-year in Q1 2017 versus a year ago.   So are wages in line?  Take a look at the following table.  Net wage gain after inflation was 0.9 percent and labor productivity gain was 1.2 percent.  The miss of 0.3 percent for compensation after adjusting for inflation is just a rounding error, in my opinion.

8-8-17a table

To read the original MarketWatch article click http://www.marketwatch.com/story/american-workers-are-missing-out-on-a-big-payday-and-heres-the-main-reason-why-2017-08-06?siteid=nwhneedtoknow

So are wages going up soon?  As long as these trends continue, and until productivity gains return, don’t hold your breath.

Ted

 

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