Waiting for wage growth

New data released today about the U.S. labor market show the economic recovery continues apace, with persistent job growth and a reduction in the unemployment rate. Yet the lack of real wage growth also reveals weakness in the economy.

The Bureau of Labor Statistics announced that the unemployment rate was 5.9 percent in September and that the economy added 248,000 jobs during the month. The reduction in the unemployment rate was due to both an increase in employment and workers dropping out of the labor force. According to the BLS household survey, the number of employed workers increased by 232,000, but the number of people not in the labor force increased by 315,000.

Put another way, the labor force participation rate declined by 0.1 percentage points to 62.7, while the employment-to-population ratio stayed flat at 59 percent. But the trend for the employment-to-population ratio is slightly different if we look at the figure for prime-age workers, those ages 25 to 54. The share of this group with a job declined by 0.1 percentage points to 76.7. The trend over the past year, however, has been upward for prime-age workers as the rate continues its climb toward its December 2007 level of 79.7.

Other measures of labor market slack decreased as well. The so called U-6 unemployment rate, which adds those marginally attached to the labor force and those working part time for economic reasons to the official unemployment rate, declined to 11.8 percent from 12 percent in August.

In addition to the increase in the pace of job creation in September, the new data show that job growth in August and July was stronger than previously thought, by 69,000 jobs. In September, both the private and public sectors added jobs, with the split going 236,000 for the private sector and 12,000 for the public sector. Within the private sector, job creation was led by professional and business services (81,000 jobs), retail trade (35,300 jobs), and health care (22,700 jobs). But job growth was less broad based in September. The diffusion index—a measure showing essentially what percent of industries added jobs—declined to 57.8 from 62.7 the previous month.

While many figures showed gains, one important statistic continues to be flat. The year-on-year growth in average hourly wages for all private sector workers was again 2 percent. Nominal wage growth (wage growth that doesn’t account for inflation) has been stuck at this level for years now. Given inflation has been roughly 2 percent over this period as well, real wage growth (inflation-adjusted) has been non-existent.

This lack of real wage growth as the unemployment rate declines may be an indicator of labor market slack. But given the tepid economic growth of the past several years, any anticipated pent- up demand for raises among workers may not appear until the unemployment rate falls even further. Either way, stagnant real wages means that many Americans are not feeling the full benefits of the labor market recovery. The labor market is healing, but the recovery will be incomplete without robust wage growth.

October 3, 2014

Topics

Wage Stagnation

Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch