Unemployment Is Below 4 Percent, But Wage Growth Is Stagnant. That’s Not Good.

Taylor Nguyen

Author: Taylor Nguyen, pictured above, @taylorln9 on Twitter

By the numbers, The United States economy has recovered, and even improved by some metrics from the pre-recession levels. Unemployment has fallen below 4 percent for the first time in 18 years, and the economy is growing at around 2-3 percent per year. At first glance, it’d seem that everyone is better off, and that’s true to some degree. But the economy still presents obstacles that are problematic for the country to reach its full economic potential.

Strangely enough, at 3.9 percent, we’re well below the 5-6 percent unemployment figure that most economists have generally considered to be “full employment”, also known as the natural rate of unemployment, or the “non-accelerating inflation rate of unemployment”  (NAIRU) for short. In theory when this happens, wages and inflation should both see a rapid increase.

But despite employment being past the point where inflation and wages should rise, both remain relatively stagnant. Wage growth for the whole economy clocked in at a sluggish 2.6 percent in the most recent jobs report, which is barely higher than the 2.1 percent inflation we experienced in 2017. This shouldn’t be happening when we’re considered to be past full employment. For readers who are unfamiliar with wonky economic talk, the concept of inflation and wages rising as we dip past the the natural rate of unemployment goes a little something like this:

As unemployment drops, companies experience an increasing shortage of workers to hire due to a decreasing number of jobless people in the labor market. After a while, businesses in theory should reach a point where unemployment becomes so low, that they experience upward pressure to raise wages in order to incentivize new workers to seek employment at their company as well as encourage current employees to stay employed their company. And when businesses experience higher labor and production costs to the point where it cuts into their profits, they’re theoretically encouraged to raise the prices of their goods in services, in order to not lose profit. But this isn’t happening.

This means that either the unemployment rate economists have considered “full employment” is much, much lower than they think, or something weird is going on in our economy. Possibly both. What gives?

Possible Explanations For Sluggish Wage Growth.

The best way I could think of to figure out some root causes for the disappointing wage growth numbers is by breaking down the analysis to more specific and targeted data points. Clearly, the unemployment rate has some room to go down, otherwise wages would be going up faster. Which means somewhere in the economy, there isn’t enough employment.

This is where an economic metric called “the Prime age employment to population ratio” aka the “working age employment rate” comes in. This measurement is helpful because it  measures people you’d expect to be working (ages 25-54) who are both in and out of the workforce. This more calculated measurement of a large portion of the workforce helps explain why wage growth hasn’t gone up despite low unemployment figures.

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The unemployment rate is the lowest it’s been in 18 years. But employment among prime age workers is not, in fact, it still hasn’t surpassed pre 2008 levels. Therefore companies aren’t experiencing that shortage of workers you’d expect.

Additionally, The youth unemployment rate (workers 16-24) is 8.5 percent. That’s more than double the 3.9 percent total unemployment figure. And the black unemployment rate is 6.8 percent, considerably higher than the economy measured as a whole.

So clearly, there is plenty of room for employment growth among prime working age people.

Wage growth since the 70’s has grown at a disappointing rate, only up 3 percent for the average worker, and wages have actually gone down for the bottom fifth of earners. And though the economy is performing rather strongly at the moment, this pattern of slow wage growth is not one we should want to continue.

How Low Wages Hurt Everyone, Including The Rich. 

Let’s go over a few things that happen as a result of low wages, and analyze their effect on the economy. Low wages tend to:

  • Decrease productivity
  • Increase Turnover Rates
  • Lower Consumer Spending

Why Decreased Productivity Is Bad

As the population of the country increases, we’ll see a nominal increase in the size of the economy, but that doesn’t mean it’s actually growing. Economic growth is to scale, and the only way to see real growth is if the country is able to increase output per worker. Low wages tend to decrease worker morale, which in turn decreases how hard they work aka, their productivity. It sounds silly, but if companies pay lower wages, workers tend to just work with less motivation. This doesn’t help anyone. The common counter-argument to that is, well maybe they should just find another job, which brings me to my next point.

Why Increased Turnover Is Bad

From a microeconomic perspective, it makes perfect sense to leave a job you’re not happy in, and I don’t fault workers for doing so. But that creates problems at a larger scale.

Off the top of my head, there are 2 obvious consequences to increased business turnover.

First, it obviously hurts business output. Companies hire because the demand they face forces them to use some of their profit to hire a new employee to meet those demands. If employees continue to leave at an increasing level, businesses will experience lower output more frequently, which actually affects those with higher incomes since they’re the one running the business.

Increased Turnover From Low Wages Hurts Consumer Spending

Leaving a job often leaves a worker unemployed, which takes away their income. If turnover increases, incomes fall. Because of the decrease in expendable income, workers in these positions end up spending less money into the economy, which hurts business profits. Workers also see their savings go down, which harms future consumption.

The United States Should Focus More On Wage Growth

The economy is not doing “bad” at all. Unemployment, while still needing improvement, is very low and economic growth is steady and positive. But the United States economy still faces some challenges that need to be addressed, wages being one of them. While hard to tell from a first glance, wage and income growth are a very important factor in a healthy, capitalist economy. It affects productivity, total output, profits, savings, and much more.

The situation could be much worse than it is, but there’s still room to grow. And it’s important for policy makers to keep that in mind before easing off the gas pedal of our economy.

 

 

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