August 10, 2015 - Urbanomics
Albeit with a brief pause during March, the pace of job creation in the United States has strengthened considerably since early 2014. According to the most recent report from the Bureau of Labor Statistics, employers added 215,000 jobs in July; unchanged from June, the unemployment rate held at 5.3 percent, the lowest level since early 2008. Broader measure of unemployment, including measures that include discouraged workers and duration of unemployment, are also improving.
In spite of sustained job creation and a lower unemployment rate, economists continue to express concerns about sluggish wage growth. One measure of wages, data from the Bureau of Labor Statistics show year-over-year increases in private sector hourly earnings was 2.1 percent in July. For Americans working in non-supervisory roles, the increase was just 1.8 percent. As shown in the following chart, wage growth was actually stronger during the recession than it is today.
As for what’s behind the problematic trends, a recent research report from the Federal Reserve Bank of San Francisco suggests it may reflect that firms were unable to reduce wages during the downturn:
… growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts … Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery1
In effect, wages have stagnated in the years following the recession because, at least in part, wage “rigidity” limits employers’ ability to cut paychecks for the employees they hold onto during bad times.
Consumers Feel the Wage Pinch, Retailers Not as Much
All things being equal, slower wage growth should mean slower growth in spending. While many retailers are struggling, that may have more to do with competition from online commerce than a scarcity of spending. Earnings are growing at a tepid pace but aggregate spending across all consumers is on the uptick. The tally of employed Americans is rising, offsetting some of the lag from wage trends.
How far has total spending diverged from individual measures of earnings? In nominal terms, economy-wide personal consumption expenditures in June 2015 were more than 20 percent above their pre-crisis peak level according to the Bureau of Economic Analysis. The more focused retail sales measure compares favorably, as well, nearly 15 percent above its late-2007 highpoint.
1 Mary C. Daly and Bart Hobijn, FRBSF Economic Letter, January 5, 2015.
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