16 June 2019

Worker Pay Stagnates Amid Meager Productivity Gains

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Compensation growth for American workers is stuck in neutral, suggesting the labor market has more slack than the relatively low unemployment rate suggests. A gauge of compensation costs that takes into account changes in worker productivity rose 2% in the third quarter from a year earlier, the Labor Department said Thursday. The change in unit-labor costs is the latest marker indicating little breakout in workers’ paychecks.

A measure of combined salaries and benefits, released last week, also advanced 2% from a year earlier in the third quarter, and average hourly earnings rose 2.2% on annual basis in September. The gains remain below historical norms and indicate that workers’ pay is barely advancing despite a 5.1% unemployment rate in September, the lowest of the business cycle. Economists expect October’s jobless rate, due Friday, will fall to 5%.

Weak productivity growth is one reason employers could be reluctant to raise wages. If workers don’t become more efficient, businesses may see little need to hand out raises. Productivity advanced at a 1.6% seasonally adjusted annual pace in the third quarter. But from a year earlier, business productivity improved just 0.4%.

The quarterly gain was largely driven by a decrease in hours worked from July through September, helping to boost productivity despite a lackluster advance in output.

The decline in hours worked surprised many economists. Data from the September jobs report showed the number of hours Americans worked increased during the third quarter. The hours-worked figure from the jobs report comes from a slightly narrower group of workers. The September figure also could be revised in Friday’s report.

In addition to measuring slack in the labor market, changes in compensation have traditionally been viewed as an indicator of future inflation. If firms don’t need to raise worker pay, they have leeway to keep prices in check. Likewise, accelerating labor costs in the 1970s were seen as primary driver of the high inflation experienced during that decade.

But Federal Reserve Chairwoman Janet Yellen earlier this year questioned whether such a relationship between compensation and inflation continues to exist. But even if the trend in compensation gains is locked at around 2%, that is well above the near flat change in consumer prices over the past year. The gains are in line with the Fed’s 2% annual inflation target. The readings suggest there is some scope for inflation to move back toward the central bank’s target in the coming months. Many economists expect that to happen as the influence of last year’s oil and fuel price declines fall out of year-over-year measures.

The Fed is closely monitoring compensation and inflation data as it considers whether to raise benchmark interest rates from near zero at next month’s policy meeting. The data could influence not just when the first move is made, but also how steeply rates will increase in the coming years.

A separate Labor Department report Thursday showed jobless claims increased by 16,000 during the week ended Oct. 31. That was the largest one-week increase since late February. But the overall level of claims remains low by historical standards, in territory that typically coincides with payroll increases and suggests employers are reluctant to lay off workers.

Click here to access the full article on The Wall Street Journal.

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