Waiting for raises: Wage growth has been a long time coming

Waiting for raises: Wage growth has been a long time coming
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The Johnny Paycheck Index, more formally known as the quits rate — the number of quits for a month as a percent of total employment — in the Job Openings and Labor Turnover Survey (JOLTS), now stands at 2.4 — the highest level of the recovery to date.

American workers are telling their bosses to “take this job and shove it” at the fastest rate since the pre-recession heights of the dot-com bubble.

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Since December 2016, the quits rate has increased by 0.4 points, an increase that required three-and-a-half years in the immediate aftermath of the recession. In July 2009, the quits rate was at an all-time low of 1.3 and did not hit 1.7 until January 2013.

The quits rate is a highly cyclical measure of the health of the labor market. Workers generally do not voluntarily leave jobs unless they have another offer in hand or are highly confident that they will be able to quickly find another job. Clearly, American workers are feeling confident about the current state of this labor market.

The latest JOLTS report also reveals that total number of job openings in the U.S. continues to set records. There are currently 7.136 million job openings in the U.S., up from 5.49 million in December 2016.

Other labor market indicators also point to its current strength. The headline unemployment rate, albeit a flawed indicator of labor market health in this economic cycle, currently stands at 3.7 percent. Monthly payroll job gains have averaged 208,000 in 2018 thus far, exceeding the average monthly job gains in both 2017 and 2016.

Other macroeconomic indicators point to the strength of the economy as well. Real GDP growth in the second quarter of this year expanded at 4.2 percent, the fastest pace of growth since 2014, and real-time trackers have third-quarter GDP growth hovering around 4.0 percent.

Given the strengthening of the overall economy and of the labor market as well, the results of a recent Gallup survey of Americans’ assessment of current U.S. economic conditions and of the economy’s trajectory should come as no surprise.

Currently 54 percent of Americans rate economic conditions as either “excellent” or “good” while only 12 percent rate it as “poor.” Well over half (57 percent) of Americans say the economy is getting better while 34 percent say it is getting worse.

These responses translate into a Gallup Economic Confidence Index of +33. The index last hit that level in January of 2004, and the last time it was higher was in November 2000.

The results of the Gallup survey also comport with the official data regarding the state of the labor market. Sixty-eight percent of U.S. adults say it is a good time to find a quality job, tying July’s rating as the highest since Gallup began asking the question in October 2001.

In December 2016, only 43 percent of Americans said it was a good time to find a quality job, a figure that has steadily increased since then.

We are experiencing strong economic growth, high levels of confidence in the economy and a labor market favoring workers that continues to tighten.

So where is the robust wage and salary growth?

The Phillips curve, long a macroeconomic staple, suggests there is an inverse relationship between unemployment rates and wage inflation (not to be confused with overall inflation, the latter drives the former, not vice versa.) Low levels of unemployment should correlate to higher rates of wage growth.

The current 3.7 percent unemployment rate is the lowest the U.S. economy has experienced since 1969, yet wage growth is still below 3.0 percent. This state of affairs has led some economists to declare that the Phillips curve is dead.

Now the Phillips curve has been prematurely declared dead more times over its history than Abe Vigoda was during his lifetime. I would suggest that this is another instance of its demise being prematurely declared.  

The Phillips curve isn’t dead, what died during this economic cycle was the usefulness of the unemployment rate as a proxy for tightness in the labor market.

The unemployment rate peaked at 10 percent in October of 2009 and began to fall from there. However, a significant portion of the decline in the unemployment rate came not from unemployed workers finding jobs, but rather from unemployed workers giving up the hope of finding a job and dropping out of the job search altogether.

This was reflected in the steady decline in the overall labor force participation rate as well as that for workers in their prime working years (25-54 years old).

A falling labor force participation rate has the perverse result of causing headline unemployment rates to fall giving the false impression that the labor market is improving even as it is getting worse.

The good news is that the participation rates for workers in their prime has been on an upward trend the past few years as the prospect of finding a job continues to improve, luring more workers back into the labor force. Hourly earnings have also been on an upward trend, recently hitting the highest growth rate in the recovery to date.

A historically weak economic recovery is showing signs of roaring back to life. There’s more room to run for wages, and Americans are right to feel optimistic about the labor market. It won’t be long until their paychecks further justify that optimism.

It has been a long time coming.

Sean Snaith, Ph.D., is the director of the University of Central Florida’s Institute for Economic Competitiveness and a nationally recognized economist in the field of business and economic forecasting.