Why America’s wage growth will remain low

The U.S. economy added jobs faster than expected in November, but wage growth continued to be anemic, according to today’s employment data released by the U.S. Bureau of Labor Statistics. Job gains of about 321,000 last month and prior upward revisions show an average monthly gain of 278,000 jobs over the previous quarter. In contrast to the increase in employment, wage growth continued to stay well below healthy rates.

While nominal wages (unadjusted for inflation) increased by 9 cents last month, the average nominal wage grew at less than a 1.8 percent annual rate over the last quarter. This rate is about half of what would be considered healthy nominal wage growth. Given the Federal Reserve Board’s target inflation rate of 2.0 percent and productivity growth of 1.5 percent, annual nominal wage growth must consistently exceed 3.5 percent before we will see sustainable real wage growth and signs of a tighter labor market. Nominal wage growth has not reached the 3.5 percent threshold for more than half a decade.

Employment gains were broadly shared across industries, with professional and business services adding 86,000 jobs, health services adding more than 37,000 jobs, and the leisure and hospitality sector growing by 32,000 jobs. Retail employment accelerated somewhat, with 50,000 jobs added last month. Some of this increase in retail employment may be reversed in future months if these stores are simply staffing up earlier than usual for holiday shopping.

The Bureau of Labor Statistics’ household portion of the survey paints not so bright a picture of employment growth as its establishment survey. The share of the prime-age population (ages 25 to 54) with jobs stayed the same last month at 76.9 percent. Prime-age men saw a slight decrease in employment, but the share of prime-age women with jobs edged up from 70.1 to 70.3 percent.

The overall unemployment rate did not change last month, remaining at 5.8 percent compared to 4.4 percent in 2007 during the peak of the last business cycle, when workers actually experienced some nominal wage growth above the 3.5 percent threshold. When the U.S. unemployment rate fell below 4 percent for five months in 2000 and when unemployment was below 5 percent in the late 1990s was the last period workers experienced sustained and broadly based wage growth.

One positive change reported by the household survey is the changing composition of the part-time workforce. Over the past three months, the number of those working part-time for economic reasons fell by an average of 142,000 per month, but those voluntarily working part-time grew by an average of 159,000 per month. Some of the increase in the voluntary part-time workforce is likely attributable to the Affordable Care Act, which weakened the tie between full-time employment and health insurance access through one’s employer. Compared to 2013, the first year workers could enroll in the new health exchanges to purchase health insurance, there are now 6 percent more workers voluntarily working part-time.

While today’s job gains were welcome and stronger than expected, even at a pace of adding more than 300,000 jobs per month we will not reach the employment rates of the prior business cycle peak until the end of 2016, nine years after the start of the last recession. The prime-age employment share remains below 77 percent, but was above 80 percent during 2007. Until we reach comparable employment rates, wage growth is likely to remain weak, particularly for those at the bottom of the income distribution.

This post first appeared on The Washington Center for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

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

Image: Image: Morning commuters are seen outside the New York Stock Exchange, July 30, 2012. REUTERS/Brendan McDermid.