What to Watch on Jobs Day: Stronger wage growth as labor market slack continues to decline

Elise Gould

Elise Gould Senior Economist, EPI

While payroll employment growth was particularly weak in March, over the longer-term employment growth has been more than enough to keep up with growth in the working age population and even pull additional people off the sidelines and into the labor market. Labor force participation still has a way to go to reach full employment levels, but the trend continues to move in the right direction. And, make no mistake, we’ve never thought these displaced workers would be sitting on the sidelines forever. In fact, we’ve been expecting the workers to return to the labor force for years.

As those sidelined workers start dwindling in numbers, we should expect stronger and stronger wage growth. Continued slow wage growth tells us that employers still hold most of the cards, and don’t have to offer higher wages to attract workers. In other words, workers have very little leverage to bid up their wages. Therefore, wage growth remains one of the most important indicators to watch in Friday’s jobs report. The fact that nominal wage growth is still below target levels is a clear sign that the economy has yet to clearly reach full employment.

Alas, nominal wage growth for private-sector workers and even nominal wage growth for production/nonsupervisory workers offers only a limited view on wage growth in the economy today. One of the major benefits of a full employment economy is that wage growth isn’t simply strong for workers at the top of the wage distribution or for workers with more educational attainment. Younger workers, black workers, workers with lower levels of educational attainment, and workers at the middle and bottom of the wage distribution are disproportionately boosted in a stronger economy just as they are disproportionately harmed in a weaker one. Research has shown that for each percentage point decline in the unemployment rate, there is stronger wage growth in the lower part of the wage distribution than in the higher part (in particular, see Figure F here). Similarly, black workers saw disproportionately stronger opportunities for employment and wage growth in the latter part of the 1990s recovery than white workers did. Workers whose prospects fall farther in recessions see these prospects grow faster when times are good.

To get finer-grained estimates of what’s happening to wage growth for particular groups of workers, we have to turn to the Current Population Survey Outgoing Rotation Group (ORG). The ORG is a household-based survey, not an employer-based one like the payroll survey, which each month provides widely-reported estimates of job growth and wage growth for private-sector workers. This is important because this means the ORG can not only ask questions of wages, but also about the demographic characteristics of respondents.

Earlier this year, I released a report on the State of American Wages in 2017, with comparisons to earlier periods as well as analysis by gender, race, and educational attainment. A key finding was a pickup in wages for the lowest-wage workers over the last couple of years. Since 2007, the labor market peak before the Great Recession, the strongest growth in inflation-adjusted (real) wages has continued to be within the top 10 percent of the wage distribution. But, from 2016 to 2017, strong growth continued at the top (1.5 percent at the 95th percentile), but the 10th percentile saw the strongest growth at 3.7 percent. This wage growth at the bottom can be partially attributed to more workers finally feeling the effects of the growing economy in their wages on top of state-level minimum wage increases occurring in states where about half of all workers reside. By looking at those data, it appears that the economic recovery is finally hitting workers at the lowest end of the wage distribution.

Unfortunately, those signs are not to be found among all historically disadvantaged groups. Much of the 2000s and 2010s have been characterized by growing wage inequality and slow or stagnant wages for many. Black-white wage gaps have worsened since 2000, and the bottom 50 percent of college degreed workers have lower wages today than in 2000. Gains for some in the last couple of years have barely if at all made up for lost ground and the economy needs to be allowed to reach and stay at full employment for an extended period for the gains to reach all workers. This is first and foremost a recommendation for the Federal Reserve: let the unemployment rate fall and keep it low so that sidelined workers can easily return and wage growth can reach target levels. Until then, and so long as price inflation remains tame, there is no reason to continue raising interest rates to slow the economy’s growth. My recent paper allows us to see below the topline wage growth number released on jobs day. Looking below the headline numbers shows a great deal of variation in how the economy hits different demographic groups as well as different wage levels. What I’ll be looking for on Friday is continued improvement in employment growth, increases in participation, and stronger wage growth.

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Reposted from EPI

Posted In: Allied Approaches

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Raise the Wage!

From the AFL-CIO

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