MC: Accelerating job growth?
CR: Check. Payrolls up almost 3 million last year, their best showing since 1999.
MC: Stabilized labor force?
CR: Check. The participation rate fell throughout the downturn and most of the recovery, but stabilized in 2014.
MC: Other measures of job market slack?
CR: Check. Underemployment, long-term unemployment, and the share of part-timers who want full-time work all fell significantly last year.
MC: Okay, then Captain Recovery, you sound like you’re finally ready for takeoff! Oh, one more thing—what about wage growth?
CR: Um…no check. Despite all of the above, it’s stuck at 2 percent, nominal. In fact, for 2014 it grew 1.7 percent, a bit less than 2013’s 1.9 percent pace.
MC: Oh…well then…please hold your position, Captain.
Okay, we’re back down here on Earth trying to figure out why wages aren’t responding to the jobs recovery. As you gleaned from the above, wage growth before inflation has been puttering along at 2 percent or so since 2010 — that’s over four years now!
Sure, with gas prices sharply lower, even these tepid nominal increases can translate into real gains. Most recently, inflation was up 1.3 percent, year-over-year, so even 2014’s 1.7 percent yields a slight real growth rate. And it’s also the case that the increase in jobs and hours means working households’ incomes can rise through more work at relatively flat real hourly wages. Weekly earnings, for example, were up 2.5 percent in 2014, around 1 percent ahead of inflation. To be clear, this implies that to the extent families are getting ahead, it’s through more work at stagnant hourly wages.
But something is clearly wrong here, folks. The tightening job market should be providing workers with a more bargaining clout leading to at least some wage acceleration, but that’s not happening. Here are some candidate explanations:
— The job market isn’t all that tight yet. The bargaining power of the American worker has been so thoroughly eroded that it takes not just getting to full employment but staying there for a while to give workers some sway in setting wages. But isn’t 5.6 percent — the jobless rate last month — pretty much full employment? Nope. That number’s still biased up a bit by a low labor force participation rate, and anyway, economists don’t know the unemployment rate commensurate with full employment. If it’s really around where we are now, why no wage or price pressures? It must be considerably lower.
— We’re adding jobs, but they’re low-wage jobs. There was certainly some evidence of that earlier in the recovery, but it now looks to me like we’re fairly consistently adding employment across most industries.
— Wage growth is constrained by low productivity growth. That’s a fair point, but while productivity is growing more slowly than it was a few years ago, it’s still growing while real compensation has been flat. In fact, there’s a metric for this question: unit labor costs, which asks how fast is pay growing compared to productivity? Since 2010, that measure has grown less than 1 percent per year.
— It’s health benefits, wiping out wage gains. Nope again. They’ve also been stuck at around 2 percent over the last few years, and as work by the Economic Policy Institute shows, employer-provided benefits haven’t grown as a share of compensation.
— It’s lousy fiscal and monetary policy. Re: fiscal policy, you definitely could have made that case in 2013. But, as I show here in my review of Friday’s jobs report, not in 2014. Of course, fiscal policy could have helped on the jobs and wage side, say through investment in public infrastructure, and that’s surely something to push for going forward. Monetary policy, on the other hand, has been consistently supportive, but has yet demonstrably failed to boost wage growth.
— It’s inequality. Bingo, and this is the critical insight we’ve got to tackle if we want to truly launch Captain Recovery. GDP growth and job growth are of course necessary — essential, in fact — if this recovery, well into its fifth year, is to start reaching the middle-class and poor. But they are not sufficient. See this presentation for all the details.
This has both policy and political implications. It’s absolutely fine and important to tout and acknowledge the cyclical recovery — the “necessary” part of the equation. But policy makers who want our support must articulate the policy architecture — the connective policy tissue — that will reunite growth and broadly shared prosperity.
Then we can talk about liftoff.