The top-line jobs number is nothing to worry about … yet. The monthly data are noisy, and we also expect the pace of gains to slow as the job market gets tighter. If you smooth out some of the noise by averaging over the past three months, monthly gains amount to 185,000 jobs, a clip that’s fully consistent with a tightening job market.
But there is a big cloud in the job market sky: Wage growth is stalled out. For many workers, wages are still beating inflation, as I’ll show, but something is wrong with this critical part of our economy. The virtuous circle should be as follows:
1) As the expansion, now in its ninth year (meaning it’s very far along, as the average business cycle expansion since 1969 lasted six years), proceeds, the accounts of households and businesses recover from the recession (often with help from monetary and fiscal policy), the population increases, “animal spirits” (economic confidence) grow, credit markets heal and consumer and investment spending fuel macroeconomic growth.
2) Demand for labor is derived from consumer and investor demand, so as spending goes up, unemployment starts to come down.
3) As unemployment falls, labor demand begins to outpace supply, and employers eventually need to bid up the pay they offer to get and keep the workers they need to meet rising demand.
Part 1, check: The U.S. economy, while not speeding along, continues to grow at a trend rate around 2 percent per year, and consumer confidence is high.
Part 2, check: The jobless rate is down sharply from its peak of 10 percent in October 2010, to 4.4 percent last month.
Part 3, not-check: At least, it’s not what we’d expect. As the figure below shows, using data from Friday morning’s unemployment report, nominal wage growth was stuck at 2 percent throughout much of the recovery, before taking off about two years ago and climbing to 2.5 percent, where it has been stuck since. The six-month rolling average even suggests some recent deceleration in wage growth, the opposite of what Part 3 of the virtuous circle would predict.
What the heck’s going on?
I’ll get to what I think are the most important suspects, but I should note that since inflation is still on the low side — prices rose 1.7 percent in the most recent CPI report — these wage growth rates still imply a rise in real earnings, though less than 1 percent, year-over-year. And there are some other wage series that show a bit more growth than the one featured here. Still, the fact remains that most workers are not sharing in as much of the economy’s growth as they should be by now, and “why not?” is among the most important economic questions of the moment.
We’re not yet at full employment: No question, the job market is tightening. But various indicators (not least of which is slow wage growth itself) suggest we’re not yet at full employment and that there’s more room to run in this labor market than the 4.4 percent unemployment rate implies. A telling indicator here is the employment rate for prime-age workers (25- to 54-year-olds, so we’re excluding retirees). It fell three-tenths of a percentage point last month, and while it has bounced back significantly from its depths in the Great Recession, it remains almost two percentage points — that’s 2.4 million people — below its pre-recession peak.
Slow productivity growth: Another aspect of how economies work is that faster productivity growth — output per hour — pays for higher wages, incomes and living standards. But productivity growth has been uniquely slow in recent years, growing at about half its historical rate (about 1 percent versus 2 percent). That means a slower growing pie and, as the next factor gets into, a tougher fight over the size of the slices for different income classes.
Weak worker bargaining clout: That’s not the story I want to tell on Labor Day weekend, but I’m afraid it may be the most determinant factor right now. As I recently discussed in PostEverything, unionization remains at historically low levels — in no small part due to aggressive tactics by anti-union employers. At the same time, the Trump administration has consistently been pursuing anti-worker measures, such as failing to raise the minimum wage or the salary threshold for overtime work and deregulating labor standards and worker protections.
What can be done to ameliorate each of these factors?
Because we’re not yet at full employment the Federal Reserve should pause on its brake-tapping interest-rate hike campaign. This is especially the case since the main inflation gauge they track has been decelerating in recent months, suggesting a conspicuous lack of price pressures for the Fed to push back on.
Economists do not know what to do to speed up productivity growth, though one good idea — one with some political currency — would be to invest in public infrastructure, both human and physical capital.
Finally, to raise worker bargaining power, first do no harm. Stop whacking away at unions and worker protections, and modernize labor laws in ways that could help reverse the long-term negative trend in unionization.
But here’s what definitely won’t help: regressive tax cuts. Eliminating the estate tax and the alternative minimum tax would help those like President Trump and his heirs, as would cutting corporate taxes and zeroing out taxes on foreign earnings of U.S. multinationals. But they wouldn’t come anywhere close to helping families that depend on paychecks as opposed to stock portfolios.