The jobs report was pretty solid. So why aren’t wages rising?

June 7, 2013

The nice thing about the latest jobs number is how very normal they seem.

The nation added 175,000 jobs in May, which is right on track with the trend over the past year (average monthly jobs gained: 172,000). The May job gains were a bit better than expected, but that was offset precisely by revisions to previous months that subtracted from earlier reported gains. The jobs report giveth and the jobs report taketh away.


The labor force, it's a shrinking (until May, that is).

The unemployment rate, meanwhile, ticked up to 7.6 percent, but that was mainly for a good reason: More than 400,000 people joined the labor force, and there weren’t enough new jobs to accommodate all those new entrants.

These are all subtle details, though. This is the big point to take away: Whatever you thought about the U.S. economy Thursday, the same should be true Friday. Nothing in this should radically reshape anyone’s theory of how the economy is doing.  And that is good news.

After more than five years on an economic roller coaster, what we need is steady, month-after-month gains in jobs that over time repair the broken U.S. labor market. It would be great if it were faster. But the most important thing is that it is continuing. If it keeps continuing for a few more years, we’ll make it out of our economic doldrums; a decade later than we might have hoped, but it beats the alternative. Just ask Spain.

That doesn’t mean there are no dark clouds. The jobs being added are concentrated to an unfortunate degree in low-paying sectors. Restaurants, bars and caterers added 38,000 jobs in May; 26,000 jobs were added by temporary help firms. It is not a great sign that fully 37 percent of job creation could be attributed to these low-paying sectors.

That also helps explain why wage growth has been in a rut; that is exactly what is to be expected if low-paying employers are adding jobs faster than high-paying ones. Sure enough, average hourly earnings for private-sector employees were essentially unchanged at $23.89; economists had expected an 0.2 percent gain. Over the past year, average hourly earnings are up 2 percent, which only barely keeps up with inflation. Yes, jobs are being added, but for the fifth straight year American workers are not seeing any real increase in their pay.

So does that add up to a good news story or a bad news story? It’s somewhat in the eye of the beholder. We won’t see meaningful wage increases until we are back closer to full employment, with an unemployment rate more in the 5 to 6 percent range than its current 7.6 percent. It is, after all, only when employers genuinely have to fear that their workers will jump ship that those workers will be able to demand raises.

But the math behind the increase in the jobless rate in May shows why getting to that tighter labor market may be a slow road yet. The proportion of Americans who are in the labor force has been falling — from 66.1 percent five years ago to 63.4 percent last month. If the rate were to rise back to its 2008 levels, another 6.6 million people would be joining the labor force, creating further downward pressure on wages. (It is hard to imagine that labor force participation will return to those old levels, however, as part of the decline was caused by demographic factors and some of those who dropped out will presumably never return to the workforce).

So this is the job market we have right now: Employers are adding jobs at a steady, persistent clip. But it is in low-wage sectors that the job creation is strongest. And there will remain downward pressure on wages as long as unemployment is high. And unemployment will probably be slow to come down as a better jobs picture coaxes people who had dropped out of the job market to rejoin it.

Does all that amount to good news or bad? By the standards of the 1990s or even the first seven years of the 2000s, it’s downright terrible. But by the standards we’ve become accustomed to since 2007, well, it’s a step in the right direction.

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Neil Irwin | June 7, 2013