Condition of the Labor Market

Update 367 — Condition of the Labor Market:
Minimum Wage, Other Workers Due a Raise

Tomorrow morning, the U.S. House will vote on the first increase in the federal minimum wage since 2009.  During that time, inflation has increased by 20 percent, an increase workers haven’t seen a penny of — in terms of wages.  

Conventional economic wisdom — confirmed statistically in practice over the decades— says the lower the unemployment rate, the higher wages go, eventually.  Unemployment has now been at historically low levels for so long, with wages flat much of that time. Millions of workers are long overdue for an inflation-beating raise.

More below on the vote and the broader condition of the U.S. labor market.  

Best,

Dana

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Last week, Federal Reserve Chair Jerome Powell testified to Congress on the state of the economy. Members from across the aisle questioned why workers’ wages have remained stagnant, despite the unemployment rate reaching record lows. Traditionally, wages increase with higher employment, so conventional wisdom is in question.

For years, many thought that the natural rate of unemployment could not be lower than 4 percent, yet today we are at 3.7 percent, and Powell said there is still room to go. As with wages, inflation is stubbornly (and unexpectedly) low, and has been since 2012 when unemployment was 7.9 percent. Powell claimed that this period of economic expansion is broader than originally expected, and job growth is reaching more communities. 

Powell’s comments suggest there is more to the story. Is wage growth something the Fed can do anything about? If not, are other factors at play? Is there something Congress can do to ensure the benefits of widespread employment are felt in the back pockets of working- and middle-class Americans?

Hot Labor Market?  Try Lukewarm

Last week, the Bureau of Labor Statistics (BLS) reported that the US added jobs for the 105th consecutive month in June while the nonfarm business sector is producing its strongest nine-month stretch of growth since 2010. Real average hourly earnings increased by 1.5 percent over the past year and real hourly earnings for all employees increased by only 0.2 percent from May to June 2019. Wages have not kept pace with productivity, and although productivity growth had been on the rise, it has actually slowed since 2005, averaging 1.2 percent over the last two years. 

Source: Economic Policy Institute

Paradox, Explained 

So, why are wages not rising as unemployment reaches multi-decade lows? There is no definitive answer and there are potentially a number of factors at play:

• Part-time Work: Unemployment statistics count those out of work and actively looking for a job. An historically large number of part-time workers in the economy want full-time work, but this desire is not reflected in the overall unemployment statistics. Part-time wages tend to be lower than full-time, potentially suppressing overall wage growth in the economy.
• Americans Working Hours Cut: Americans are working fewer hours than they were before the recession. This lessens weekly take-home pay of non-salaried workers, and helps account for paltry wage growth. 
• Structural Change: The need for employers to raise wages remains muted as the labor participation rate edges up and more workers are willing to join the workforce. In his testimony last week, Powell noted this increased participation from communities traditionally left out of the job market.

What Can Congress Do?

The Fed makes monetary policy, not economic policy. For wage growth solutions and ways to boost labor’s share of national income, we may have to look to Congress. 

• Minimum Wage: The minimum wage rate has been raised 22 separate times. As of 2007, the current minimum wage is $7.25 per hour. Raising the federal minimum wage would increase earnings for workers whose wages are at or near the federal minimum and stimulate aggregate demand by providing greater purchasing power for workers receiving a pay increase.
  • Sen. Sanders and Rep. Scott have introduced the Raise the Wage Act (S. 150 / H.R. 582) for the 116th Congress. It would raise the federal minimum wage to $15 by 2025 and index the minimum wage to median wage growth. It would also abolish the sub-minimum wage for non-tipped workers. The bill would boost wages for about 27 million people. The Senate bill has 31 cosponsors. The House bill has 205 cosponsors and a full floor vote on the bill is expected to pass tomorrow; the Senate is unlikely to pick it up. 
• Labor Laws: Over the last several decades, labor unions have been undermined and coverage for workers has declined. Congress can step in and revive worker protections, modernize labor policy, and, in doing so, kickstart wage growth. Legislatively, Congress can update overtime, classification, and forced arbitration rules, strengthen collective bargaining power, and secure universal access to sick leave and paid family leave. Such changes would either directly increase wages, or empower workers to seek restitution for underpayment. Through its budgeting power, Congress can also award government funding and contracts only to firms that adhere to wage, health, and safety laws, incentivizing a worker-friendly corporate culture.

Economic, Not Monetary Policy

The Fed’s ability to produce sustainable wage inflation through its monetary policy dual mandate is in question.  Perhaps there is more slack in the labor market than originally thought. The Fed could then lower rates (as they have hinted) this month with little concern of overheating the labor market.  Or, does the lack of wage growth suggest something more structural is at play that monetary policy cannot address? 

Cutting rates at this stage of the business cycle is more likely and more immediately a stimulus to capital markets and to asset appreciation than it is to wages or employment levels. Increasingly, it seems like Congress, rather than the Fed, needs to step up to the plate with bold policy ideas that can provide the wage growth so many Americans need and deserve.