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Is Wage Growth Poised to Take Off?

Is Wage Growth Poised to Take Off?

Almost 10 years after the Great Recession, wage growth is still not close to pre-recession levels. Average hourly earnings as tracked by the Bureau of Labor Statistics (BLS) have averaged an annual growth rate of 2.2% since January 2010 compared to the average Consumer Price Index (CPI) of 1.7% over the same period. Wages are barely beating inflation.

Reasons for the slow wage growth are numerous. However, several indicators suggest wage growth could accelerate.

Since late 2009, wage growth has morphed from anemic, to improving, to moderate as the economy transformed from recession, to recovery, to expansion. Since the recession, there has been a pattern of three levels of flat growth lasting roughly 2.5 to three years each. From 2010 to 2012, wage growth averaged 1.9% annually. It shifted to an average of about 2.1% annually through mid-2015. From there, it has averaged about 2.5% annually.

The question going forward: Will there be another, higher level of flat growth for a few more years, or will wage growth trend steadily higher in response to the tighter employment market and continuing economic growth?

Why Has Wage Growth Been Weak?

Several theories have been posited for the weak wage growth performance during and after the recovery. Globalization, outsourcing and technology have spread employment growth and productivity around the world. A number of American jobs are being replaced with automation, shipped overseas to lower wage locales or outsourced to contractors that don’t require paying as many benefits as full- or part-time employees. The result is reduced wage pressure on full- and part-time employees.

Another factor is weak productivity growth in the past several years. Productivity growth has averaged less than 1.0% annually since 2010. Normally, higher productivity should lead to stronger wage growth, but since the 1970s, there has been a widening disconnect between productivity and wages, perhaps due to a decreasing economic impact of technological advances on productivity. In other words, computers and technology can only increase productivity so much for most jobs.

Of course, the sheer number of workers thrown out of the workforce as a result of the Great Recession created a large pool of potential hires that has also eased pressure on wage growth over the past few years – although, this pool is rapidly dwindling. And early in the recovery, many of the jobs created were in lower-paying retail and food service positions, not in the higher-paying employment sectors.

This pool of unemployed and underemployed workers peaked at the end of 2009 as reflected in the alternate measure of labor underutilization – the U6 unemployment rate. The U6 rate is the total unemployed, persons marginally attached to the labor force and total employed part time for economic reasons as a percent of the civilian labor force. It topped 17% in October 2009, the highest rate ever recorded since this measurement began. Currently, it stands at 7.8%, less than half the peak.

Other potential headwinds to wage growth include decreased union membership, no federal minimum wage increase since 2009, the proliferation of non-compete clauses in employment contracts and retiring older workers that are being replaced with younger, lower-wage workers.

What Could Spur Along Wage Growth?

Though there are several factors likely limiting wage growth, there are also several suggesting that wages may be poised for more robust growth.

Monthly employment gains have averaged about 200,000 jobs since late 2010. Those steady gains are despite the U3 (or “headline”) unemployment rate dropping to its lowest level since 2000 and landing where most economists consider “full employment.”

The civilian labor force participation rate (LFPR) averaged between 66% and 67% from roughly 1990 through 2008, before plummeting to an average of just under 63% in the past four years. This may be the new normal for this measure as baby boomers retire and others that left the workforce during the recession stay out of the pool.

Normally, this would be a headwind to wage growth given the potential for out-of-labor force civilians to re-enter the workforce. But despite the low LFPR (and the 6.3 million currently unemployed), a skills mismatch will keep many jobs from being filled right away, putting pressure on employers to raise wages and salaries to attract qualified candidates. With the emphasis on high school students attending college for almost any degree, certain fields and positions are being neglected, especially in the skilled trades such as electricians, plumbers and carpenters.

Another potential tailwind for wage growth is the reduction of H1B and other programs that many employers have utilized to attract specially skilled or talented employees and spouses.

Additionally, softer productivity gains will eventually require employers to increase staffing or work harder to hold onto qualified staff members in order to keep up with increasing demand for goods and services as the economy continues to grow.

The Outlook

Wages will undoubtedly continue to grow and perhaps accelerate from the current, moderate pace of 2.6%. Despite historical headwinds that hampered wage growth after the Great Recession, there are more potential tailwinds and positive indicators that point to stronger growth in the next few years as the economy continues to expand. Whether that growth is flat over the next two or three years as it has been in the past or increases with a steeper trend line remains to be seen.

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