In March, we solved the mystery of America’s missing wage growth. Here is the conundrum facing PhD economists:
One of the biggest conundrums, one that has profound monetary policy implications, and that has been stumping the Fed for the past year is how can it be possible that with 5.5% unemployment there is virtually no wage growth. The mystery only deepens when the Fed listens to so-called economist experts who tell it wage growth is imminent, if not here already, and it is merely not being captured by the various data series.
In fact, the Fed is still trying to understand why wages aren’t rising more quickly. After all, once you triple-adjust the Q1 GDP print, the economy is on sound footing. Here's an excerpt from Janet Yellen’s speech in Rhode Island last month:
Finally, the generally disappointing pace of wage growth also suggests that the labor market has not fully healed. Higher wages raise costs for employers, of course, but they also boost the spending and confidence of customers and would signal a strengthening of the recovery that will ultimately be good for business. In the aggregate, the main measures of hourly compensation rose at a rate of only around 2 percent through most of the recovery.
The answer to this apparent quandary, lies in the distinction between what the BLS classifies as “non-supervisory” workers and “supervisory" workers. The following charts tell the story nicely.
What the above suggests is that in fact, wage growth in America has never been higher — for your boss. Or, put differently:
For all who are still confused why there are no wage hikes despite the Fed's relentless efforts to micromanage the economy and stimulate wage growth via trickle-down record high stock market prices, the answer is that there is wage growth.
Just not for 83% of the working population.
Now, with pundits parroting the “robust” jobs market refrain on the nightly news, “everyday Americans” are beginning to ask “where’s my raise?” WSJ has more:
The unemployment rate here and in other thriving metropolitan regions across the U.S. is below where it was when the financial crisis blew a hole in the U.S. economy in 2008. Now, many American workers are asking: Where’s my raise?
Questions about the slow pace of wage growth aren’t only stumping workers, but also economists and policy makers at the Federal Reserve—with the answers weighing on households and the larger U.S. economy.
When U.S. unemployment rates fall, conventional notions of supply and demand predict wages will go up as firms bid for increasingly scarce workers, and there are signs of that, for example, in building trades and restaurants. “Basic economics hasn’t gone out the window,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in an interview. “When employment grows, wages will start to grow.”
But a Wall Street Journal analysis of Labor Department data points to persistent constraints on worker pay, even as the economy approaches full employment. The Journal found 33 U.S. metropolitan areas—from the small to the sizable—where unemployment rates and nonfarm payrolls last year returned to prerecession levels. In two-thirds of those cities—including Columbus; Houston; Oklahoma City; Minneapolis-St. Paul, Minn.; and Topeka, Kan.—wage growth trailed the prerecession pace.
Stagnant incomes are a long-running problem for the American middle class. Median household income, adjusted for inflation, was $51,939 in 2013, only slightly higher than it was in 1988, when it was $51,514. Slow wage growth is part of the problem; adjusted for inflation, blue-collar pay has increased just 0.3% a year over the past quarter-century.
Companies tapping pools of workers who have disappeared from the U.S. unemployment tallies, creating what economists describe as hidden slack in the economy. Until this invisible labor supply is spent, these men and women, including part-timers, temporary workers and discouraged labor-market dropouts, could hold wages down.
In other words, as long as global trade is "in the doldrums" (to quote BofAML) and as long as aggregate demand is subdued, wage growth will remain elusive for more than three quarters of American workers.