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Wage Growth Continues to Disappoint

We’ve seen years of healthy job growth in the U.S., with unemployment falling below 6%…

  • August 26, 2017

We’ve seen years of healthy job growth in the U.S., with unemployment falling below 6% in the fall of 2014 and to 5% in the fall of 2015 (it’s now at 4.3%). Yet, wage growth continues to disappoint.

According to the latest release from the Labor Department, real average hourly earnings for all employees increased 0.2 percent from June to July, seasonally adjusted.

Real earnings are wages adjusted for inflation. So, this result stems from a 0.3-percent increase in average hourly earnings being partially offset by a 0.1-percent increase in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings increased 0.2 percent over the month due to the increase in real average hourly earnings combined with no change in the average workweek. Real average hourly earnings increased 0.7 percent, seasonally adjusted, from July 2016 to July 2017.

The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 1.1-percent increase in real average weekly earnings over this period.

Not very exciting, is it?

There isn’t a single good explanation for this phenomenon of healthy job growth and sluggish wage growth.

Many point to the (still lagging) workforce participation rate – which would indicate that many Americans have simply dropped out of the workforce (and are thus not being counted in unemployment statistics). We actually have a lot more competition for jobs than the official unemployment rate would lead us to believe.

Others point out that the bulk of the jobs being created are lower-paid positions. In that scenario, we see an economy replacing higher-paid pre-recession jobs with lower-paid post-recession jobs.

Still others point to the lack of workforce productivity growth in the economy overall. For decades, American businesses enjoyed strong growth in this area. They increasingly got more work done from fewer employee hours worked, which led to increasing profits. Workers were able get “a piece of the action” in the form of higher wages.

Productivity growth has all but flat lined in the last ten years. At the same time, other costs that impact the employer/employee balance sheet – most notably healthcare costs – have continued to increase faster than inflation. All of this puts a damper on employers’ ability to raise wages.

It’s likely that all of these conditions are factors in the slow wage growth we’re seeing.

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