Keeping our heads above water: Wage gains barely outpace inflation
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According to the Bureau of Labor Statistics, the U.S. economy generated 211,000 net new jobs in April, bringing total job creation in this labor market recovery to over 15 million. That is a large number, but at this stage it still falls behind the labor market recovery of the 1990s and is a far cry from job creation during the recovery of the 1980s. Still, at 79 months old, one cannot deny that this has been a lengthy and impressive cycle thus far.

More folks who want to work are employed. In April, the unemployment rate fell by one-tenth to just 4.4 percent, which is the low for the current labor market cycle and matches the low of the previous cycle in the 2000s. During the depths of the labor market downturn, the unemployment rate had soared to 10 percent, the highest since the early 1980s.

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Even taking into account all the people who could be more fully employed, which would include those who are too discouraged to look for work but would like a job, as well as those who are employed part-time and want to work full-time, the unemployment rate has fallen by an even greater amount, from 17.1 percent to 8.6 percent in April.

 

You may or may not be surprised to discover that more than 60 percent of all private sector jobs created in this recovery have been in low-paying service industries of the economy. It may be more surprising to know that this share is actually lower than during the prior two labor market recoveries.

Where the current recovery compares poorly is on wages. Nearly 80 months into this labor market recovery, average hourly earnings are growing at an annual pace of just 2.5 percent per year. When adjusted for inflation we are barely holding our heads above water. According to a consensus of economists, consumer prices are expected to have advanced by an annual 2.3 percent in April, which means growth in real wages is just above zero.

This is perhaps the most disappointing development of the current cycle. In the wake of the financial crisis, job losses were so high that getting people who lost their jobs back into the workforce hasn’t required a good deal of cajoling on the part of employers. Although wages have strengthened over time, it’s been a painfully slow process.

Think Small

The general lack of business dynamism in this recovery has been well-documented. The Bureau of Labor Statistics, for example, shows that the number of jobs created by new businesses (those less than one year old) has declined from upwards of 4 million in 1994 to 3 million in 2015, partly as a result of a slow rate of new business formation.

Whether this has been related to a lack of credit availability or an increased regulatory burden (likely both), the fact is that small- and medium-sized businesses (those with less than 500 employees) have not led the pack in hiring throughout much of this expansion, which is quite abnormal. A recent and encouraging development, then, has been the long-awaited emergence of hiring among these employers.

Since the U.S. presidential election, we find that while large employers (those with greater than 500 workers) have maintained the existing pace of hiring, small and medium-sized employers have greatly increased theirs. This development has occurred alongside a strong pickup in our business formations tracker that suggests the entrepreneurial spirit is thawing.

Small business optimism, captured in the National Federation of Independent Business' Small Business Optimism index, has also soared, corroborating the quicker pace of hiring. So has the index of hiring plans, suggesting we might expect continued strength in employment gains for small businesses.

There has also been a pickup, albeit modest, in plans to increase wages over the next three months, a measure which has historically led growth in wages and salaries. Better late than never.

 

Ellen Zentner is the chief U.S. economist and managing director for Morgan Stanley.


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