Last Friday, we learned that workers’ wages may — that’s “may” — finally be catching a buzz in year nine of this economic expansion, and the financial markets freaked out. Let’s look at the facts, the economics and, especially, the politics of this curious reaction.
The facts: The current economic expansion began way back in mid-2009; that’s when gross domestic product growth turned positive. But jobs and wage growth lagged behind the overall economy. Employment didn’t start growing until 2010, and wage growth has been a particularly notable laggard.
To be clear, I’m talking about nominal wage growth, before accounting for inflation (although inflation will become an important part of this story). Doing the analysis this way allows us to focus in on a key relationship: that between tight labor markets and worker bargaining clout. Real wages can be driven by other factors, as in 2015, for example, when a global glut of oil hammered consumer price growth down to zero, so even slow wage growth posted real gains.
The figure below tells the story. There are lots of different wage series, and you have to look at all of them to get what’s going on, but this is the one that popped up 2.9 percent, year-over-year, last month, along with a six-month trend to smooth out the bips and bops. Nominal wage growth tanked in the recession, stabilized at around 2 percent and sat there for about five years. In 2015, as the job market started to tighten up, it picked up from 2 to 2.5 percent, where it’s roughly been since.
Other series show about the same trajectory, including my beloved “mash-up,” shown below, wherein I combine five different wage series. It’s a longer time series, so you can see the boom/bust pattern.
The economics: While I tend to focus on labor-market tightness, there’s a lot more that drives wage growth, including worker productivity, changing demographics/education of the workforce, firm concentration (monopolistic competition hurts paychecks), union power, trade, technology and labor standards, such as minimum wages and overtime rules. Aside from demographics, most of those factors have been negatives for wage growth in recent years, especially for middle- and lower-wage workers. Taken together, they explain the increase in wage inequality seen in figures like this one, which shows the yawning gap between productivity and median compensation.
Yet, even amid all this blowback, when the job market tightens up enough, employers still must bid wages up to get and keep the workers they need to meet robust consumer demand. Giving pay raises has become so antithetical to doing business that it takes a super-tight job market to trigger these effects, which is why we may be finally starting to see some action, but it’s going to take a lot more than a one-month pop to make the case. As I stressed in my reporting on the day the jobs numbers came out, another series that covers the lower-paid 80 percent of the workforce was up only 2.4 percent, so hold the champagne.
But how does any of this explain Friday’s market (over)reaction?
At least three reasons: profit margins, inflation and the Federal Reserve. Equity prices reflect current and future expectations of corporate profitability, and I just pointed out that the dominant business model for years has had, at its core, the suppression of labor costs to boost profit margins. The success of the model can be seen in the figures below. The chart on the left shows the decline in labor’s share of national income; the one on the right shows the profit margin of firms in the Standard & Poor’s 500-stock index. Faster wage growth threatens to rebalance these inequalities. That would be great for the vast majority who depend on paychecks vs. stock portfolios, but it spooks markets.
Second, markets worry the faster wage growth will lead producers to raise prices to maintain profit margins. Last Friday, this dynamic led bond investors to demand a higher return on their loans as a hedge against higher inflation. It also led to worries that the Fed would raise the benchmark interest rate it controls faster than planned. Faster interest rates slow growth, which raises concerns about future profits, which helped trigger Friday’s selloff.
This was mostly, not wholly, an overreaction. As the mash-up figure shows, there’s no threatening wage trend in play yet, wages have a lot of catching up to do and — important from the market and the Fed’s perspective — in recent years, the correlation between wage and price growth has been pretty low. That said, Friday’s results served as a reminder that the relationship between tight job markets and faster wage growth isn’t dead. It’s just been sleeping.
The politics: President Trump and his treasury secretary have long elevated the stock market as their report card. That’s a rookie mistake because, as we just saw, markets don’t just go up. But their embedded assumption that stock-market returns lift the working class is flat-out wrong: 84 percent of the market’s value, including stocks in retirement accounts, is held by the wealthiest 10 percent of households.
Any model wherein higher paychecks are threatening to the business sector is fundamentally broken. I don’t just mean that in terms of basic economic fairness. It’s also a broken economic model. For example, to the extent that wage gains occur through shifts from profits to wages, that’s not at all inflationary. And, of course, in a 70 percent consumption-based economy like ours, middle-class wage stagnation is bad for growth.
It’s also, to state what I hope is obvious, bad for politics. The dominant wage-suppression model has allowed a phony populist to gain power by promising to change it. Moreover, his opening was facilitated by a Democratic opposition that has heretofore been unable or unwilling to forcefully and convincingly articulate a different model, one of inclusive, balanced growth.
I will soon begin a series of articles in this space as to what that model looks like. It’s not rocket science; its components are widely known, including universal health coverage, direct job creation for those left behind even at full employment, labor standards, college affordability, work supports including child care, trade deals and monetary policy that gives workers’ reps a seat at the table — stuff like that.
But for now, recognize that what happened Friday — Wall Street tanked because Main Street caught a break — is a symptom of an unsustainable, yet dominant, economic model. And that must change.