Latest jobs report has us waiting for wage whiplash

Latest jobs report has us waiting for wage whiplash
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A long time ago, before the Great Recession, books about the job market had titles like, "The War for Talent," and companies fretted over losing workers to the Baby Boomer retirement wave. It is quaint today to think back to these concerns.

The popular perception of a jobless recovery has persisted, despite functionally being at full employment, and we're still waiting for the wage pressure and raises that usually come with sustained growth. 

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During the beginning of a recovery, it is interesting to track the jobs numbers on the first Friday of every month as the economy returns to full employment. Here at full employment, it is more interesting to track wage trends.

 

Once most people looking for a job have one, the labor market dynamic shifts from a competition for jobs to a competition for workers, and the way employers compete for workers is through wages. 

In today's job report, steady job growth continued, and year-over-year hourly wages increased by 2.4 percent. Not bad, but this is the place where the recovery hasn't performed so far, and it's the data to watch over the coming year. 

Wages have a stickiness to them that we commonly see in recessions. When a company hits problems, they may lay off workers or cut hours, but it is much harder for them to cut pay. It is possible that we are now seeing wage stickiness during the recovery as well.

It has been such a long, slow recovery that workers and employers alike just aren't thinking about raises. In the face of competition, employers may feel unable to increase prices, which would be a helpful driver of increased wages in the absence of increased productivity.

Workers themselves, still scarred from the recession, may just be happy to have a job. In other words, both employers and employees haven't yet shifted their mental models to a job market where the competition is for workers, not jobs.

Despite the lack of serious raises, there are many reasons to expect wages to rise. Just this week, we saw the appointment of Jay Powell at the Fed, who is expected to continue a cautious policy of gradually increasing rates. We also saw Congress take a significant step toward more expansionary fiscal policy in the form of the first cut at tax reform.

In the labor force, there is a host of reasons that will likely constrict the supply of workers in the near term — a contraction that, in turn, would drive up wages. The Baby Boomer generation is in the midst of retirement. The decades-long process of women entering the workforce is largely done.

We have an administration that has a restrictionist approach to immigration. We also have a serious opioid epidemic that is sidelining a significant number of working-age adults, skilled and unskilled alike.

To be clear, many of these factors are not positives for our economic growth, but they are parts of a trend in labor force participation that has been declining for years. There are other trends that counteract some of these issues, most notably technology adoption and automation. However, on balance, the short-run environment seems to point toward increased wage pressure.

It seems unlikely that compensation will defy the economic fundamentals forever. It's as if employers are playing a game of musical chairs and nobody has realized that there are way too few chairs for everyone to have a seat when the music stops.

When wage growth does come, it is possible that this lag in perception will result in a wage whiplash as employers struggle to catch up with increased compensation in addition to skills gap issues, retirements and succession planning.

Of course, as we were all reminded not so long ago, there are worse economic problems to be dealing with.

Matt McDonald is a partner at Hamilton Place Strategies, a public policy consulting firm. Previously, McDonald served under President George W. Bush as associate communications director at the White House with responsibility for economic issues.