U.S. jobs growth remains too slow

The employment and earnings data released today by the U.S. Bureau of Labor Statistics show that wages are still growing but at too slow of a rate to stem the historical rise in wage inequality. Although job gains are slowly tightening the labor market, the current pace of growth will continue to keep full employment a remote prospect.

Wages increased in August over the last year at a rate of 2.2 percent, similar to last month. And over the past three months, wages have grown at a 1.9 percent rate showing little sign of significant acceleration. Since the beginning of this year, the average wage of production and non-supervisory workers, who make up more than four-fifths of the workforce, has been growing at a slower rate than for the overall private sector, implying an increase in wage inequality.

Two of the industries seeing faster wage growth than the overall private sector are the leisure-and-hospitality sector, where wages increased by 2.9 percent over the last year, and the retail sector, where wages rose by 2.5 percent. Minimum wage increases and political pressures to increase wages in these sectors are among the factors driving wage growth. More than 70 percent of all minimum wage workers are employed in these two industries.

Employment grew by 173,000 in August, or about an average monthly gain of 221,000, over the last three months. Growth at these rates is helpful but not fast enough to secure an employment rate consistent with healthy wage growth any time soon. Next month’s employment release, for September, will mark six full years of consecutive monthly employment growth during the recovery, since October 2010. Yet the employed share of the prime-age population (ages 25 through 54) remains at 77.2 percent, well below even the lowest rate the economy sunk to after the end of the 2001 recession, 78.6 percent.

During a recovery, a healthy economy should be experiencing very rapid growth as it grows and recovers from prior employment losses. But last month the number of employed workers increased by only 1.5 percent at an annual rate, contrasting sharply with prior, more robust recoveries. Three years after the end of the 1990-1991 recession, for example, employment grew consistently by more than 3 percent each month at annual rates. Yet over the last six years, there have been only three months when monthly employment increased at an annual rate of more than 3 percent.

The proportion of working teenagers remains very low, too, at 28.0 percent last month, falling over the course of this year. Looking over the entire post-World War II period, when the earliest comparable data on teen employment begins, the teen employment-to-population ratio has never been so low as it has been during this recovery. In particular, teen employment now is substantially lower than in the late 1960s or 1970s, when minimum wages were higher. In 1968, when the inflation-adjusted minimum wage was at its highest point, 42 percent of the teen population was employed, about 50 percent more than was the case last month. Higher minimum wages than the United States has today were consistent with a much healthier labor market for teens.

The Federal Reserve should focus on the weak labor market later this month when it discusses raising interest rates, as doing so will slow both employment and wage growth. For both teens and the prime-age working population, employment rates remain significantly below rates during the depths of the prior recovery. Only now are hiring rates and quit rates—at 4.0 and 2.2 percent, respectively, in June—similar to levels at the nadir of the previous business cycle ending in 2007. Throughout the subsequent recovery, nominal wage growth (before factoring in inflation) has remained well below rates that preserve workers’ share of national income over the long run.

In addition, recent research shows that raising interest rates depresses the economy more than the stimulus provided by lowering rates, consistent with the idea that it’s harder to “push a string.” As a result, although raising rates too late is easy for the Fed to correct through future increases, raising rates too early may disproportionately stymie the recovery. Both the weak labor market and the asymmetric effects of monetary policy provide reasons for the Fed to avoid raising rates this year.