Strong job growth. Weak wages. What’s wrong with this picture?

Larry Kummer, Editor

10 years ago

Summary: Amidst the cheering about the latest strong jobs report, some analysts puzzle about the failure of wages to rise as strongly. The answer is simple. Job growth is weak, not strong. It’s even slower than US population growth. Of course wages are weak. The coming new industrial revolution will make today’s job market look like a fiesta. We need to start preparing.

Median usual weekly real earnings of wage & salary workers (16+ years old)

1979 – 2015: rise of +0.07%/year (total +2.6% over 36 years, including 5 recessions).
Q1 2008 – Q4 2015: rise of +0.4%/year SA (+3.0%) during this recovery.

Derek Thompson at The Atlantic asks “How Can a Jobs Recovery So Historic Be So Disappointing?”

… one could easily argue that the U.S. is in the midst of a historic job recovery. With the most consecutive months of private-sector job growth in history, this is, to honor the beginning of baseball season, truly a DiMaggio Economy. Even better, the job growth in the last 3 months has, by one measure, been the strongest of any quarter-year since 1983. The entire recovery has been in full-time work.

The puzzle results from bogus comparisons. Too short a view: the bounce-back from the worst recession in 70 years has produce large gains but little change from the previous peak. A trivial metric: the number of months with rising employment (Clinton and Reagan had longer runs, but with one month interruptions). Using absolute numbers to measure job growth vs. past cycles: it makes the present look great because the US has more people (Obama has produced job gains of 200 thousand per month — George Washington never did that!).

A better measure of job growth is annual per cent growth in non-farm jobs. The graph shows that this recovery is slightly weaker than the 1990s expansion, and much weaker than the Reagan boom.

But all jobs are not equal. A better measure of the economy’s ability to employ people is private sector hours worked. This peaked in June 2007 (the recession began in December). Almost nine years later total hours worked has increased 5.1% — an annualized rate of only 0.6%. During that time the number of potential workers has growth 9.1% (i.e., civilian non-institutional population age 16+).

A broader indicator of the job market’s strength is the Fed’s Labor Market Conditions Index. In March 2007 it was 0.84; in February — year 8 of “a historic jobs recovery” — it was –0.05. Not the fuel for zooming wages.

An even broader measure of the economy’s power to generate jobs and wages is per capita GDP. It has been dropping since the 1960s; this expansion continues that weakness.

Conclusions

Why are wages weak? Corporations have weakened existing unions and organized to prevent their spread. They use immigration to suppress wages in sectors that might otherwise have strong wage growth (e.g., using H1B visas). Wage gains spark outsourcing to cheaper nations. But above all, wages are weak because economic growth is weak. All this is a mystery only to those who do not want to see.

This graph compares job growth (blue) vs. population growth (red: civilian non-institutional over 16), with December 2007 = 100. That gap shows our failure to generate enough jobs. Supply rising faster than demand means the price of labor (wages) is weak.

Ahead of us lies the new industrial revolution, already begun on a small scale, with its immense job destruction. The clock is running. We need to prepare.