Considerable lingering labor market slack is still a drag on
wage growth. The linkages between wage growth and price inflation are not very
tight at all. Both findings should lead those poised to snuff out wage
growth — in the case of the Fed, by raising interest rates — to stand
down.
A key challenge for the Fed in recent years has been
figuring out just how tight or slack the job market is, a question that’s been
harder than usual because the unemployment rate isn’t as revealing a signal as
usual. The reasons for the weaker signal are weak labor force participation and
unprecedented shares of long-term unemployment, both of which dampen the
jobless rate’s traditional dominance as a measure of labor market tautness.
Simply put, the job market is not as tight as the
6.2 percent unemployment rate implies.
How does this relate to wages? A central theme is that one
way you know that the job market is truly tight is when you see real wages
consistently rising, especially for lower-wage workers. These are the workers
with the least bargaining power, and just about the only time they’re going to
get a boost is when employers must bid their pay up to get and keep the workers
they need.
So, if you’re having trouble figuring out conditions in the
job market, you need to evaluate wage trends, and as these recent papers reveal
— and as you probably know if you’re drawing a paycheck — pay for most workers
has been pretty stagnant for a while now.
Let’s look at the evidence. As you’d expect, there’s some
improvement as the job market tightens, but not enough yet to produce real wage
gains across the scale. Nominal wage growth on a quarterly basis using
five different wage series have shown that they’ve basically been stuck at 2
percent since 2009. Surely, a tightening labor market should show up somewhere
in those series. And with inflation running at about the same pace, the
implication is stagnant hourly wages.
The BLS released their monthly earnings analysis showing
that over the past year, both average hourly pay and inflation rose 2 percent,
such that the growth in real buying power was zero. Two recent reports from
Federal Reserve economists reveal the impact of slack on wage growth in
interesting detail. In both cases, these analysts are assessing that since a)
short-term unemployment has returned to its pre-recession levels, and b) the
long-term unemployed don’t add much to slack — they’re basically out of the job
market but haven’t quite realized it yet — the job market is actually
pretty tight.
Based on the significant and negative correlations between
wage growth and labor slack, both studies reject that hypothesis, finding
that as far as wage growth is concerned, the current job market isn’t
that tight at all.
A new analysis from economists have emphasized:
Even if wage growth does pick up, its connection to inflation is “more akin to
a tangled web than a straight line.” They generate two important findings about
that tangled web. First, while slack and wage growth are still significantly
and negatively correlated, that’s no longer the case between slack and price
inflation. Second, it follows that wage growth doesn’t feed into inflation in a
big way.
All of this research yields bad news and potentially good
news. The bad news is that five years into a recovery, wage growth remains far
too weak and far too narrowly experienced. The good news is that the central
bankers will take to heart the lessons from this new research: Though some
economists are saying otherwise, considerable slack remains in the job market.
Should wage growth accelerate, and this research convincingly suggests that it
will as the job market tightens, that should not be assumed to be inflationary.
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