More U.S. jobs but paltry wage gains for most workers
The latest U.S. jobs numbers show that employment rose by 252,000 in December, and the unemployment rate dropped to 5.6 percent. Yet there remains considerable slack in the US economy, leaving most workers unable to achieve meaningful wage gains.
Today’s employment and earnings data from the U.S. Bureau of Labor Statistics demonstrate that increases in employment during 2014 did not tighten the labor market enough to achieve the kind of healthy real wage gains (after accounting for inflation) needed to strengthen family incomes and reduce inequality. Hourly earnings fell last month, but this is likely the product of preliminary and noisy data—averaged over the last quarter wages for private-sector workers grew at a paltry annual rate of 1.1 percent.
This rate is not even one-third of what is considered healthy wage growth. For workers to achieve meaningful real wage gains, the annual rate of wage growth must reliably exceed 3.5 to 4.0 percent, assuming the Federal Reserve’s target inflation rate of 2.0 percent and a productivity growth rate of 1.5 percent. The last time hourly earnings consistently grew at 4 percent was in 2007, at the peak of the last business cycle.
Even excluding this month’s data, year-over-year wage growth in 2014 averaged about 2.0 percent, similar to the rate in 2013. Although the Fed indicates that it will raise interest rates this year, the labor market shows zero signs of accelerating wage growth. Indeed, the last time production and nonsupervisory workers saw regular wage increases at an annual rate of about 4 percent, the prime-age employment-to-population ratio was around 80 percent, yet over the past year this ratio grew from just over 76 percent to 77 percent. If employment gains continue at this rate, prime-age employment rates will not reach 80 percent until sometime in the year 2018.
The BLS establishment survey shows that overall employment increased by 252,000 in December, led by job gains in the construction industry, where they jumped by 48,000. This might be due to the unusually warm weather in December, in which case construction employment growth may appear stagnant in later months. Still, with upward revisions to prior months, the average monthly employment increase over the last three months has been about 289,000. Adding 34,100 jobs last month, the health care sector has grown by an average of 36,400 over the last three months.
The unemployment rate dropped from 5.8 to 5.6 percent, but most of this decline is attributable to workers leaving the labor force. The household survey showed that unemployment fell by 383,000 and that the labor force shrank by 273,000. If those exiting the labor force been counted as unemployed then the unemployment rate would be more than 5.7 percent.
The U.S. economy clearly has a long way to go before a tight labor market produces consistent and meaningful wage gains for ordinary workers.