What to Watch on Jobs Day? Hopeful signs of stronger wage growth

More and more analysts, including many at the Fed, seem to have decided that the U.S. economy has reached full employment. They might be right, but the data on this is far from a slam dunk—and the costs of prematurely declaring full employment and working to slow the recovery far exceed the costs of waiting too long to restrain growth and allowing some wage and price inflation.

While the unemployment rate has ticked down considerably over the last few years, there still seems to be considerable slack in labor force participation, as evidenced most strongly in quite depressed employment-to-population ratios of even prime-aged (25-54 year old) workers. If this weren’t the case—if the apparent slack in these employment and participation numbers wasn’t real—we would be seeing faster wage growth as employers bid up wages to attract and retain the workers they want. So, what am I looking for in Friday’s jobs report, and what do we need to see to validate judgements that we have attained genuine full employment? Signs of stronger wage growth.

Year-over-year nominal wage growth has picked up over the last several years (as shown in the figure below). It’s now at about 2.7 percent growth, up from 2.4 percent the previous year, and up from an average of about 2.0 percent in 2010 through 2014. While this is certainly a welcome sign, it is still below levels consistent with the Federal Reserve’s 2 percent inflation target combined with trend productivity growth of 1.5 percent.

Earlier this week, the New York Times’s Neil Irwin wrote a provocative story on why he thinks this is too-ambitious a nominal wage target. His argument relies on current inflation rates and productivity growth. As he puts it: “Consider a simple model for how much the average worker’s pay ought to be rising: You could simply add together the productivity growth rate—how rapidly the output generated by each hour of labor is increasing—and the inflation rate, which tells us how quickly prices are rising.” According to this reasoning, recent nominal wage growth has come in right on target if one uses current estimates of inflation and productivity.

But we’d argue strongly that you shouldn’t use current estimates of inflation and productivity. Instead, you should use the Fed’s stated long-run inflation target and the best available estimates on the long-run trend in productivity. This difference matters.

Nominal Wage Tracker

Nominal wage growth has been far below target in the recovery: Year-over-year change in private-sector nominal average hourly earnings, 2007–2017

Date All nonfarm employees Production/nonsupervisory workers
Mar-2007 3.44% 4.17%
Apr-2007 3.13% 3.85%
May-2007 3.53% 4.14%
Jun-2007 3.61% 4.13%
Jul-2007 3.25% 4.05%
Aug-2007 3.35% 4.04%
Sep-2007 3.09% 4.09%
Oct-2007 3.03% 3.72%
Nov-2007 3.07% 3.89%
Dec-2007 2.92% 3.75%
Jan-2008 2.91% 3.80%
Feb-2008 2.85% 3.79%
Mar-2008 3.04% 3.71%
Apr-2008 2.89% 3.70%
May-2008 3.07% 3.69%
Jun-2008 2.67% 3.62%
Jul-2008 3.05% 3.67%
Aug-2008 3.33% 3.89%
Sep-2008 3.28% 3.70%
Oct-2008 3.32% 3.93%
Nov-2008 3.50% 3.80%
Dec-2008 3.59% 3.90%
Jan-2009 3.58% 3.72%
Feb-2009 3.43% 3.65%
Mar-2009 3.28% 3.53%
Apr-2009 3.37% 3.35%
May-2009 2.93% 3.11%
Jun-2009 2.88% 2.88%
Jul-2009 2.69% 2.76%
Aug-2009 2.44% 2.64%
Sep-2009 2.44% 2.75%
Oct-2009 2.53% 2.68%
Nov-2009 2.15% 2.73%
Dec-2009 1.96% 2.50%
Jan-2010 2.09% 2.66%
Feb-2010 2.09% 2.55%
Mar-2010 1.81% 2.27%
Apr-2010 1.81% 2.38%
May-2010 1.90% 2.54%
Jun-2010 1.76% 2.53%
Jul-2010 1.85% 2.42%
Aug-2010 1.75% 2.36%
Sep-2010 1.84% 2.19%
Oct-2010 1.93% 2.51%
Nov-2010 1.79% 2.18%
Dec-2010 1.74% 2.02%
Jan-2011 1.92% 2.17%
Feb-2011 1.83% 2.06%
Mar-2011 1.83% 2.06%
Apr-2011 1.87% 2.11%
May-2011 2.04% 2.05%
Jun-2011 2.13% 2.05%
Jul-2011 2.30% 2.26%
Aug-2011 1.95% 1.99%
Sep-2011 1.94% 1.99%
Oct-2011 2.07% 1.72%
Nov-2011 1.98% 1.82%
Dec-2011 2.07% 1.87%
Jan-2012 1.79% 1.40%
Feb-2012 1.79% 1.45%
Mar-2012 2.14% 1.71%
Apr-2012 2.09% 1.65%
May-2012 1.74% 1.44%
Jun-2012 1.96% 1.54%
Jul-2012 1.69% 1.33%
Aug-2012 1.86% 1.33%
Sep-2012 1.99% 1.38%
Oct-2012 1.51% 1.28%
Nov-2012 1.94% 1.43%
Dec-2012 2.11% 1.58%
Jan-2013 2.06% 1.89%
Feb-2013 2.19% 2.04%
Mar-2013 1.88% 1.88%
Apr-2013 1.97% 1.78%
May-2013 2.14% 1.93%
Jun-2013 2.17% 2.03%
Jul-2013 2.04% 2.03%
Aug-2013 2.26% 2.23%
Sep-2013 2.08% 2.28%
Oct-2013 2.25% 2.27%
Nov-2013 2.20% 2.37%
Dec-2013 1.98% 2.26%
Jan-2014 2.02% 2.31%
Feb-2014 2.23% 2.50%
Mar-2014 2.14% 2.35%
Apr-2014 2.01% 2.40%
May-2014 2.13% 2.44%
Jun-2014 2.00% 2.34%
Jul-2014 2.09% 2.38%
Aug-2014 2.21% 2.43%
Sep-2014 2.04% 2.27%
Oct-2014 2.03% 2.27%
Nov-2014 2.03% 2.21%
Dec-2014 1.86% 1.92%
Jan-2015 2.19% 2.01%
Feb-2015 1.93% 1.61%
Mar-2015 2.22% 2.00%
Apr-2015 2.26% 2.00%
May-2015 2.30% 2.14%
Jun-2015 2.09% 1.99%
Jul-2015 2.21% 2.04%
Aug-2015 2.24% 2.08%
Sep-2015 2.32% 2.13%
Oct-2015 2.56% 2.32%
Nov-2015 2.39% 2.12%
Dec-2015 2.52% 2.56%
Jan-2016 2.51% 2.45%
Feb-2016 2.38% 2.45%
Mar-2016 2.45% 2.44%
Apr-2016 2.61% 2.58%
May-2016 2.52% 2.33%
Jun-2016 2.64% 2.52%
Jul-2016 2.76% 2.61%
Aug-2016 2.55% 2.46%
Sep-2016 2.75% 2.65%
Oct-2016 2.74% 2.50%
Nov-2016 2.65% 2.50%
Dec-2016 2.85% 2.54%
Jan-2017 2.56% 2.39%
Feb-2017 2.84% 2.48%
Mar-2017 2.63% 2.34%
Apr-2017 2.51% 2.38%
May-2017 2.46% 2.42%
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*Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income.

Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series

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I’ll start with inflation. The Fed’s inflation target is 2.0 percent. The Fed’s key inflation target is based on core personal consumption expenditures (PCE). Over the last year, it rose only 1.7 percent. It’s important that we recognize this as an average not a ceiling, meaning that the recent long period of sub-2.0 percent price inflation should be followed by an extended period when price growth exceeds 2 percent annually for a spell. But because price inflation is strongly influenced by wage inflation, if the Fed is serious about wanting 2 percent price inflation in the long run, it cannot have nominal wages rise as slowly as they have in recent years. Irwin’s implicit recommendation that we declare nominal wages growing fast enough would lock in price inflation below the Fed’s long-run target.

Second, why is it important to target the long-run trend in productivity growth rather than current estimates? Because “nowcasting” productivity growth consistently fails. This long-run trend in productivity is universally thought to be higher than the growth we’ve seen in very recent years, which has seen a pronounced slowdown in productivity growth. But taking this slower productivity as an unchangeable feature of the U.S. economy would be a mistake. In fact, it could well be that slow wage growth is a culprit for slow productivity growth. In that case, pushing wages up further by continuing to let the labor market tighten could increase productivity as employers gain incentives to make the additional capital investments to make those workers more productive. If we take today’s slower productivity as given for the future, we are shortchanging the economy and its workers, who won’t reap the rewards of full employment.

On both counts—inflation and productivity—policymakers should see very recent data as coming in too slow and should target faster growth. Let’s say, though, that we finally hit nominal wage growth in the range consistent with the Fed’s target and trend productivity. What then? Do we stop there? No! If the pace of nominal wage growth is exceeding the Fed’s target and productivity trends, that means workers are finally reclaiming some of the income that capital had been receiving in prior years, as workers’ bargaining power had been hamstrung by the slow recovery. The labor share of income is still quite low in historical terms. We have yet to reach the labor share at the lowest point in the business cycles of the 1980s or 1990s. We need to do a better job of digging out of the hole dug in the Great Recession and its aftermath. To do that, we need to see sustained stronger wage growth. And we shouldn’t declare wage growth strong simply by defining down our inflation and productivity expectations.

Nominal Wage Tracker

Workers’ share of corporate income hasn’t recovered: Share of corporate-sector income received by workers over recent business cycles, 1979–2017

Labor Share
Jan-1979 79.0%
Apr-1979 79.5%
Jul-1979 80.2%
Oct-1979 80.8%
Jan-1980 81.2%
Apr-1980 82.7%
Jul-1980 81.9%
Oct-1980 80.6%
Jan-1981 80.3%
Apr-1981 80.4%
Jul-1981 79.6%
Oct-1981 80.5%
Jan-1982 81.6%
Apr-1982 81.0%
Jul-1982 81.0%
Oct-1982 81.4%
Jan-1983 81.0%
Apr-1983 79.9%
Jul-1983 79.4%
Oct-1983 79.1%
Jan-1984 77.8%
Apr-1984 78.0%
Jul-1984 78.5%
Oct-1984 78.3%
Jan-1985 78.4%
Apr-1985 78.6%
Jul-1985 78.2%
Oct-1985 79.6%
Jan-1986 79.9%
Apr-1986 80.8%
Jul-1986 81.5%
Oct-1986 81.8%
Jan-1987 81.7%
Apr-1987 80.9%
Jul-1987 80.4%
Oct-1987 80.9%
Jan-1988 80.9%
Apr-1988 80.9%
Jul-1988 80.8%
Oct-1988 80.2%
Jan-1989 80.6%
Apr-1989 80.9%
Jul-1989 80.9%
Oct-1989 81.9%
Jan-1990 81.8%
Apr-1990 81.6%
Jul-1990 82.7%
Oct-1990 83.1%
Jan-1991 82.2%
Apr-1991 82.5%
Jul-1991 82.8%
Oct-1991 83.3%
Jan-1992 83.0%
Apr-1992 83.1%
Jul-1992 83.6%
Oct-1992 83.0%
Jan-1993 83.5%
Apr-1993 82.7%
Jul-1993 82.7%
Oct-1993 81.4%
Jan-1994 81.4%
Apr-1994 81.3%
Jul-1994 80.6%
Oct-1994 80.3%
Jan-1995 80.6%
Apr-1995 80.4%
Jul-1995 79.5%
Oct-1995 79.7%
Jan-1996 79.1%
Apr-1996 79.1%
Jul-1996 79.2%
Oct-1996 79.3%
Jan-1997 79.0%
Apr-1997 78.9%
Jul-1997 78.3%
Oct-1997 78.5%
Jan-1998 79.9%
Apr-1998 79.9%
Jul-1998 79.8%
Oct-1998 80.4%
Jan-1999 80.3%
Apr-1999 80.6%
Jul-1999 81.0%
Oct-1999 81.4%
Jan-2000 81.8%
Apr-2000 81.9%
Jul-2000 82.4%
Oct-2000 83.1%
Jan-2001 83.1%
Apr-2001 82.8%
Jul-2001 83.0%
Oct-2001 84.0%
Jan-2002 82.0%
Apr-2002 81.8%
Jul-2002 81.8%
Oct-2002 80.9%
Jan-2003 80.3%
Apr-2003 80.1%
Jul-2003 79.8%
Oct-2003 79.9%
Jan-2004 78.8%
Apr-2004 78.7%
Jul-2004 78.6%
Oct-2004 78.5%
Jan-2005 77.0%
Apr-2005 76.9%
Jul-2005 77.2%
Oct-2005 76.0%
Jan-2006 75.5%
Apr-2006 75.4%
Jul-2006 74.7%
Oct-2006 76.1%
Jan-2007 77.3%
Apr-2007 76.9%
Jul-2007 78.3%
Oct-2007 79.4%
Jan-2008 79.8%
Apr-2008 79.7%
Jul-2008 80.1%
Oct-2008 83.7%
Jan-2009 79.8%
Apr-2009 79.4%
Jul-2009 78.4%
Oct-2009 77.4%
Jan-2010 76.4%
Apr-2010 76.7%
Jul-2010 74.9%
Oct-2010 74.9%
Jan-2011 77.1%
Apr-2011 76.0%
Jul-2011 76.0%
Oct-2011 74.2%
Jan-2012 74.6%
Apr-2012 74.2%
Jul-2012 73.9%
Oct-2012 74.6%
Jan-2013 74.0%
Apr-2013 73.6%
Jul-2013 73.5%
Oct-2013 73.8%
Jan-2014 75.9%
Apr-2014 74.5%
Jul-2014 73.6%
Oct-2014 74.2%
Jan-2015 74.4%
Apr-2015 75.2%
Jul-2015 75.6%
Oct-2015 76.6%
Jan-2016 76.3%
Apr-2016 77.0%
Jul-2016 76.3%
Oct-2016 76.2%
Jan-2017 76.8%
ChartData Download data

The data below can be saved or copied directly into Excel.

Note: Shaded areas denote recessions. Federal Reserve banks' corporate profits were netted out in the calculation of labor share.

Source: EPI analysis of Bureau of Economic Analysis National Income and Product Accounts (Tables 1.14 and 6.16D)

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