More than 6 years after the end of the Great Recession, the strength of the U.S. labor market remains not entirely clear. The U.S. economy has added jobs for 57 straight months, and the number of unemployed workers per job opening has fallen to 1.6 this past May, from 6.8 in July 2009. The unemployment rate now stands at 5.3 percent compared to its peak of 10 percent in October 2009. Unemployment levels today are approaching what some economists think is probably the unemployment rate compatible with full employment.
But the unemployment rate is currently not as useful at measuring the health of the labor market as it usually is, due to a variety of factors leading to the decline of the labor force participation rate. There are other ways to measure the health of the labor market, such as the prime-age employment-to-population ratio, which is the share of workers ages 25 to 54 with a job. As of June 2015, it was 77.2 percent, is still below its pre-Great Recession level of 79.7 percent. So how will we know when the labor market is starting to reach a better place? When wage growth picks up.
Increasing wage growth is a sign that workers have increased bargaining power with their employers. As the labor market tightens, employers have a smaller pool of unemployed workers from which to potentially hire. So if they want to hire already employed workers, they have to offer them a higher wage or salary. There are no signs of this kind of increased bargaining power in the U.S. labor market. Annual nominal wage growth, measured by the U.S. Bureau of Labor Statistics’ average hourly earnings statistic, has been hovering around two percent over the past five years, merely keeping pace with inflation.
But there was hope that accelerated wage growth is just around the corner, at least according to another metric compiled by the Bureau of Labor Statistics, the Employment Cost Index. In the first quarter of 2015, the index seemed to be accelerating, with a 2.6 growth rate registered over the past 12 months. That acceleration looked even larger for private-sector workers, jumping to 2.8 percent.
Why might the Employment Cost Index paint a different picture than average hourly earnings? First, it includes employer benefits in its measure of compensation whereas average hourly earnings only looks at cash wages and salaries. Secondly, the index accounts for the changing composition of jobs over time. Wage growth might happen because overall employment shifts towards higher- or lower-paid industries and occupations. The Employment Cost Index controls for that and looks only at how compensation rates have changed over time, holding constant the industrial and occupational structure of the labor market.
Alas, the latest release of the index this past Friday seems to have squashed belief in more swiftly accelerating wage growth. According to data for the second quarter of 2015, overall compensation grew at a 2 percent rate over the past 12 months, with compensation growth for private-sector workers going up by only 1.9 percent over the same time period.
In other words, wage growth looks flat no matter the measure, even when we look at just the wage and salary component of compensation in the Employment Cost Index. Consider Figure 1 below. The graph looks at the growth in three different measures of wages: average hourly earnings for all private-sector workers, average hourly earnings for production and non-supervisory workers, and the Employment Cost Index’s measure of wages and salaries for private-sector workers. A lift off for wage growth doesn’t look imminent by any measure. Indeed, the trend for the Employment Cost Index would be even more quiescent if occupations with bonus pay are excluded—the factor that may have been behind the jump in the index in the first quarter of this year.
What does this lack of wage acceleration mean? In a way, this is good news for the U.S. labor market. If demand for jobs is still slack, then policymakers can take more aggressive action to put people to work through fiscal policies, such as more spending on much-needed infrastructure upgrades, and by maintaining today’s loose monetary policy. An uptick in wage growth would mean that the labor market is tightening. The absence of persistent, strong wage growth implies that estimates of the unemployment rate compatible with full employment should be moved downward from current 5-percent levels.
But just because policymakers can do something to boost the demand for jobs doesn’t mean they will. The U.S. Federal Reserve Board seems primed to raise interest rates this year despite the lack of accelerating wage growth that’s still below a healthy wage target of 3.5 to 4 percent. Congress, meanwhile, doesn’t seem likely to engage in fiscal stimulus via infrastructure spending or any other policy in the near future. Wage growth is the dog that hasn’t barked yet. Policymakers should be concerned by the silence. But for some reason they aren’t.