I’ll get into the weeds momentarily, but the three reasons are:
— There’s still slack in the job market.
— Productivity growth is slow.
— Many workers have too little bargaining clout in our highly unequal economy.
I’ve got policy solutions for each one of these, by the way, so you’ll definitely want to postpone your weekend and read through to the end.
First, the facts. Friday’s jobs report showed that the unemployment rate fell to 3.9 percent last month, its lowest level since late 2000. The report also showed, however, that wage gains, before inflation, have been stuck at 2.6 percent. Moreover, as the figure below shows, even as the job market has tightened, this wage series — the year-over-year hourly wage growth for private-sector workers — has been jiggling about 2.5 percent for about two years running.
It is also worth noting that consumer inflation has been running just slightly below this level (2.4 percent, year-over-year, in March), meaning that in buying-power terms, hourly pay is up by pennies over last year.
Shouldn’t the tighter job market result in faster wage growth?
To some extent, it clearly has. As you see in the figure, after getting slammed in the recession (shaded area) and initially weak recovery, nominal wages finally started to accelerate around 2015, picking up their pace from about 2 to 2.5 percent, where they’ve since languished.
Other dynamics, besides the falling unemployment rate, are in play here, including people entering and leaving the job market (lower-wage workers coming into the job market can reduce the pace of wage gains). Also, other series are more optimistic than this one. One series I like to trot out in this context is my wage mash-up, a smushing together (that’s the technical term) of five different wage series. It shows more steady acceleration, but this far into an expansion that’s closing in on full employment, its growth pace remains below past expansions at this point.
Slack remains: At such low unemployment, aren’t we already at if not beyond full employment? I don’t think so. Even at year nine of the current expansion, there are people and places that haven’t yet been reached.
Consider the share of the prime-age (25-54) population with jobs. While this important and large group of workers has consistently been clawing back their losses since the last recession, they’re still short of where they were. Their employment rate fell more than 5 percentage points in and after the recession (from about 85 to 79 percent), but as the figure below shows, they’ve clawed back 4.4 percentage points of that loss. So 20 percent to go, which translates to 7 million potential workers, i.e., a fair bit of slack.
This also implies that the Federal Reserve can be more patient in terms of rate hikes. With slack left, price and wage pressures have yet to really materialize.
There is, however, an important caveat: Some of these workers face significantly barriers to joining even a hot job market. These include health or skill deficits, criminal records and long periods of joblessness. Others live in places where there aren’t enough jobs. As I stress below, these findings have important policy implications.
Low productivity growth: When the job market tightens, firms must typically bid up their wage offers to get and keep needed workers. When that occurs, to maintain their profit margins they try to squeeze out any inefficiencies. That is, they want to pay for wage gains with higher productivity, not by cutting into profit margins.
That hasn’t happened yet in this expansion. A bit before the last recession, productivity growth slowed by about half, from around 2 percent to around 1 percent, and it hasn’t picked up since.
Low worker bargaining clout: But that just raises another riddle. Even at low productivity, workers in tight labor markets should be able to wrestle some of those elevated profits into paychecks. The reason that has yet to occur in any big way is a function of the uniquely low bargaining clout of many in the U.S. workforce. Unionization is at historical lows, and there’s also more monopolistic concentration among big firms (giving them the upper hand in wage setting), along with eroding labor standards such as low minimum wages and inadequate overtime rules.
What can be done to ameliorate these three problems and boost pay such that people who depend on their paychecks, as opposed to their stock portfolios, can finally get their fair share of the expansion?
Start with that caveat above about how some of the remaining labor supply needs help to overcome the barriers they face. That implies the need for interventions such as job training, apprenticeships (“earn-while-you-learn”) and some form of a government job creation or job subsidy program when the private market isn’t creating enough employment opportunities.
The problem is that these interventions cost money, so step one is reversing the wasteful, regressive tax cut and using some of that revenue to help people who need the help.
Productivity growth is tougher, as economists don’t really know what drives this critical variable up and down. However, tight labor markets do force the issue in terms of incentivizing firms to find new efficiencies, which brings me to the last point.
If workers had more bargaining clout, they could push for higher wages, reduce inequality and incentivize firms to be more productive. So we should improve labor standards, raise minimum wages and overtime thresholds, extend labor protections to gig workers, facilitate collective bargaining and push back on the quasi-monopolies that use their size to distort the wage structure.
Of course, that all would take a very different set of politicians. It’s time to start the weekend; I’ll get to that problem next week.