Waiting for Wage Growth

By Justin Dean

Employment figures for June indicate a labor market with little slack, but the ongoing weakness of wage growth remains a mystery. The labor market that continues to expand, adding jobs for the 81^st straight month in June, according to the Bureau of Labor Statistics’ (BLS) monthly employment report. Some 222,000 jobs were created in June, and revisions to April and May data added another 47,000 jobs to the official figures. The unemployment rate ticked up slightly in June but for a reason considered positive at this point during recovery: the labor force increased at a greater rate than jobs were added. All told, 361,000 more workers were in the labor force than in May.

Off of the Sidelines, Into the Labor Market

The broadest measures of unemployment suggest that perhaps discouraged workers are in fact returning to the workforce. In March, the U-6 rate, the broadest measure of unemployment that includes discouraged workers, those marginally attached to the labor force and those working part-time for economic reasons, fell below nine percent for the first time during the recovery cycle. 

There is still plenty of cause for concern regarding a skills gap and the impact that the declining retail sector will have on uneducated workers. However, for the time being, it appears that those who want a job are able to find one with relative ease and there are enough jobs available to entice discouraged workers to come off the sidelines and back into the job market. 

Even teenagers, the cohort with by far the highest unemployment rate, are starting to see jobs more become available. The unemployment rate for 16- to 19-year-olds fell a full percentage point in June, from 14.3 percent to 13.3 percent, and declined a whopping 260 basis points year-over-year. What makes this especially surprising is that the retail sector, long a friendly sector for teenage employment, has been one of the worst performing sectors in 2017. Despite adding 8,000 jobs in June, the retail sector lost 36,000 jobs since the end of last year.

Moreover, the teenage unemployment rate has been falling, while the participation rate for 16- to 19-year-olds increased 120 basis points during the same period in 2016. That might be the clearest signal we have that there is not much slack left in the labor market.

Alternative Measures of Employment Display Positive Signs

The Federal Reserve Bank of St. Louis’s Labor Market Condition Index (LMCI), which combines 19 metrics to assess changes in the labor market, continued its run of positive figures for the year. The LMCI typically drops massively during a recession and is slightly positive during expansions. For example, the index hit a low of -43.5 points during the great recession and averaged 3.9 during the extended recovery. For June the LMCI was 1.5, a low mark on the year with an average now sitting at 2.9. This would be the best year measured by the LMCI since 2014 and a positive rebound from the -0.4 average in 2016. 

The Job Opening and Labor Turnover Survey (JOLTS) data indicates a healthy labor market. Layoffs and Discharges remained at 1.1 percent, the lowest rate since the BLS began tracking the data in 2000. The quit rate, at 2.2 percent, continued to be at highs not seen since before the Great Recession, which is a positive sign. 

Where is the Wage Growth?

A low unemployment rate and a high quit rate should cause firms to compete for workers, leading to higher wage growth, but so far that has not been the case. Wages grew 4 cents in the month of June and 63 cents over the year, equating to a 2.5 percent year-over-year increase.  Yearly wage growth has been stuck in the two to three percent range for more than five years now, leaving many wondering if we will ever see the days of three to four percent growth that were common during times of economic expansion before the great recession.

On top of the general macroeconomic risk middling wage growth could pose if it persists, it could have more direct effects on commercial real estate. Apartments will find lackluster demand for new units and have less opportunity to increase rents. Retailers, already faced with a disconcerting state of affairs, will struggle to increase the sales of their goods and services.

Chart courtesy of the Bureau of Labor Statistics