When will US workers see healthy wage growth?

The U.S. economy added 223,000 jobs in April, after downward revisions brought the prior month to only 85,000 jobs. Over the last three months the economy has on average added about 191,000 jobs. At the same time, wages in the private sector grew in April by 2.2 percent over the last year, far below what is typically considered healthy nominal wage growth.

For workers to maintain or increase their share of income, nominal wages must grow at an annual rate of at least 3.5 percent, assuming the Federal Reserve’s inflation target of 2.0 percent and annual productivity growth of 1.5 percent. In contrast, nominal wages grew by 2.2 percent over the last year and at an annual rate of 2.3 percent over the last three months. Looking at the last three months is typically a way to understand recent trends without being tricked by month to month fluctuations. Last month’s acceleration in the three-month rate, to 2.7 percent, however appears more like noise than an encouraging trend.

Wage growth continues to stagnate for production and non-supervisory workers. Since January wage growth for this group of workers, who comprise about four-fifths of private sector employment, has consistently been below the rate of wage growth for all workers, suggesting a contribution to increasing wage inequality. Nominal production wages grew by only 1.9 percent in April, compared to last year.

Nevertheless wages appear to be growing at healthier rates in the leisure and hospitality sector, which includes restaurants, where annual wage growth was 4.0 percent over the last three months. During that time period wages in the construction industry grew at an annual rate of about 3.7 percent. Financial sector wages grew at 2.6 percent during the last three months, above the 2.3 percent average for the overall private sector.

Essentially no sector performed exceptionally well last month in creating jobs. Professional and business services added about 62,000 jobs. Construction added 45,000 jobs, but this sector also lost jobs in March, so that over the last two months it only added 36,000 jobs. Manufacturing employment remained essentially unchanged, as one would expect given the recent increase in the trade deficit.

The employed share of the population ages 25 through 54 remained at 77.2 percent in April, basically unchanged since an uptick in January of this year. This is not encouraging news for wage growth. Although there are many signals for labor market tightness, a key indicator is the prime-age employment-to-population ratio. When employment rates are higher, employers are compelled to raise wages in order to attract and retain workers.

During the last twenty five years, nominal wage growth has only sustainably exceeded a target of 3.5 percent when the prime-age employment-to-population ratio was at least 79 percent, substantially above the current employment rate.  The employed share of the prime-age population grew by nearly one percentage point in 2014, but currently growth seems to have slowed to about 0.7 over the past year to 0.8 percentage points during the past three months. As a result, we should not expect to see the employment-to-population ratio exceed 79.0 percent until more than two years from now, sometime in mid-2017. And only then can we expect to see healthy nominal wage growth.

With no substantial acceleration of wage growth, there is still significant slack in the US labor market. A 5.4 percent unemployment rate with weak wage growth suggests that there either is a large reserve of potential workers not yet in the labor force, or that the unemployment rate can fall substantially below economists’ usual targets of an unemployment rate consistent with a tight labor market without sparking wage inflation.

This article is published in collaboration with The Washington Centre for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Ben Zipperer is a Research Economist at the Washington Center for Equitable Growth.

Image: U.S. dollar notes are seen in this picture illustration. REUTERS/Nicky Loh.