There has been a spate of good economic news recently. Notably, April’s job report was strong, soundly beating analyst estimates. To be specific, the U.S. economy added 211,000 jobs in April, and the unemployment rate, now at 4.4%, fell to its lowest level since 2007. In fact, the Bureau of Labor Statistics reported recently that unemployment rates were lower in March than a year earlier in 336 of the 388 metropolitan areas it measures. And, in a promising turn, the labor participation rate has also stopped declining and is holding steady at 62.9%.
However, what has been noticeably absent in this economic recovery is wage growth. Factoring in inflation, wages are essentially flat with average hourly earnings rising a modest 2.5%, levels also seen in the midst of the worst recession in U.S. history.
This is surprising given what you might anticipate in the labor market we are currently in. Common wisdom would suggest that as the labor supply deteriorates, wages should increase as employers compete for a limited available pool of talent. To make matters worse, some economists are concerned this flat wage growth could have a detrimental effect on the economy if it negatively impacts consumer spending.
What forces are weighing against wages? Here are some of the theories suggested by economists:
· Demographic shifts in the economy. Some have argued that as higher wage earning boomers retire, their younger, less experienced replacements are taking those positions at a lower pay scale and with fewer increases.
· Still too much slack in the labor market. The percent of 25 to 54 year olds who were employed either full-time or part-time at the time of the State Population Survey stood at just 78.6% in April, still well below pre-recession levels.
· Productivity is weak. Productivity, the measure of how much a given worker or machine can produce, has been sluggish. To protect profit margins in a time of weak productivity, employers may be keeping a lid on labor expenses.
Whatever the cause, it appears that we have not completely shaken off the last recession. More robust job growth, and/or other structural economic changes, may need to occur for wage growth to rise to levels we might expect in a recovery as strong as this.
ASE Members will get a glimpse of actual wage movement in Michigan at the upcoming Compensation and Benefits Conference on May 23rd. Kevin Marrs and Jason Rowe will discuss recent trends in wages in the release of the ASE Annual Compensation Survey for the state of Michigan. For information on attending, please visit the ASE website.
Sources: Chicagotribune.com, economicoutlookgroup.com