What to watch on Jobs Day: The call for a rate increase is not backed up by wage data

On Friday, the Bureau of Labor Statistics will release the November numbers on the state of the labor market. On December 15, the Federal Open Market Committee will meet to determine whether they should raise interest rates, and most prognosticators think that this time they will actually go through with it. Last month’s stronger than expected jobs report led many to declare, prematurely, that it is time to start raising rates in order to ward off incipient inflation. The reality is that we need to see strong wage growth that is consistent and strong enough so that labor share of income returns to pre-recession levels and the labor market achieves a full recovery. Then, and only then, should we begin a conversation about raising rates.

Over the last six years, nominal wage growth has continued hover around 2.0 to 2.2 percent, far below target (see below on the target). Yes, October’s year-over-year growth was stronger—2.5 percent for nonfarm employees, although it was lower for production and nonsupervisory workers (2.2 percent). But again, one month of data is not sufficient evidence, and even 2.5 percent is still far below the wage target.

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, 2007-2016

All nonfarm employees Production/nonsupervisory workers
Mar-2007 3.59% 4.11%
Apr-2007 3.27% 3.85%
May-2007 3.73% 4.14%
Jun-2007 3.81% 4.13%
Jul-2007 3.45% 4.05%
Aug-2007 3.49% 4.04%
Sep-2007 3.28% 4.15%
Oct-2007 3.28% 3.78%
Nov-2007 3.27% 3.89%
Dec-2007 3.16% 3.81%
Jan-2008 3.11% 3.86%
Feb-2008 3.09% 3.73%
Mar-2008 3.08% 3.77%
Apr-2008 2.88% 3.70%
May-2008 3.02% 3.69%
Jun-2008 2.67% 3.62%
Jul-2008 3.00% 3.72%
Aug-2008 3.33% 3.83%
Sep-2008 3.23% 3.64%
Oct-2008 3.32% 3.92%
Nov-2008 3.64% 3.85%
Dec-2008 3.58% 3.84%
Jan-2009 3.58% 3.72%
Feb-2009 3.24% 3.65%
Mar-2009 3.13% 3.53%
Apr-2009 3.22% 3.29%
May-2009 2.84% 3.06%
Jun-2009 2.78% 2.94%
Jul-2009 2.59% 2.71%
Aug-2009 2.39% 2.64%
Sep-2009 2.34% 2.75%
Oct-2009 2.34% 2.63%
Nov-2009 2.05% 2.67%
Dec-2009 1.82% 2.50%
Jan-2010 1.95% 2.61%
Feb-2010 2.00% 2.49%
Mar-2010 1.77% 2.27%
Apr-2010 1.81% 2.43%
May-2010 1.94% 2.59%
Jun-2010 1.71% 2.53%
Jul-2010 1.85% 2.47%
Aug-2010 1.75% 2.41%
Sep-2010 1.84% 2.30%
Oct-2010 1.88% 2.51%
Nov-2010 1.65% 2.23%
Dec-2010 1.74% 2.07%
Jan-2011 1.92% 2.17%
Feb-2011 1.87% 2.12%
Mar-2011 1.87% 2.06%
Apr-2011 1.91% 2.11%
May-2011 2.00% 2.16%
Jun-2011 2.13% 2.00%
Jul-2011 2.26% 2.31%
Aug-2011 1.90% 1.99%
Sep-2011 1.94% 1.93%
Oct-2011 2.11% 1.77%
Nov-2011 2.02% 1.77%
Dec-2011 1.98% 1.77%
Jan-2012 1.75% 1.40%
Feb-2012 1.88% 1.45%
Mar-2012 2.10% 1.76%
Apr-2012 2.01% 1.76%
May-2012 1.83% 1.39%
Jun-2012 1.95% 1.54%
Jul-2012 1.77% 1.33%
Aug-2012 1.82% 1.33%
Sep-2012 1.99% 1.44%
Oct-2012 1.51% 1.28%
Nov-2012 1.90% 1.43%
Dec-2012 2.20% 1.74%
Jan-2013 2.15% 1.89%
Feb-2013 2.10% 2.04%
Mar-2013 1.93% 1.88%
Apr-2013 2.01% 1.73%
May-2013 2.01% 1.88%
Jun-2013 2.13% 2.03%
Jul-2013 1.91% 1.92%
Aug-2013 2.26% 2.18%
Sep-2013 2.04% 2.17%
Oct-2013 2.25% 2.27%
Nov-2013 2.24% 2.32%
Dec-2013 1.90% 2.16%
Jan-2014 1.94% 2.31%
Feb-2014 2.14% 2.45%
Mar-2014 2.18% 2.40%
Apr-2014 1.97% 2.40%
May-2014 2.13% 2.44%
Jun-2014 2.04% 2.34%
Jul-2014 2.09% 2.43%
Aug-2014 2.21% 2.48%
Sep-2014 2.04% 2.27%
Oct-2014 2.03% 2.27%
Nov-2014 2.11% 2.26%
Dec-2014 1.82% 1.87%
Jan-2015 2.23% 2.01%
Feb-2015 2.06% 1.71%
Mar-2015 2.18% 1.90%
Apr-2015 2.34% 2.00%
May-2015 2.34% 2.14%
Jun-2015 2.04% 1.99%
Jul-2015 2.29% 2.04%
Aug-2015 2.32% 2.08%
Sep-2015 2.40% 2.13%
Oct-2015 2.52% 2.36%
Nov-2015 2.39% 2.21%
Dec-2015 2.60% 2.61%
Jan-2016 2.50% 2.50%
Feb-2016 2.38% 2.50%
Mar-2016 2.33% 2.44%
Apr-2016 2.49% 2.53%
May-2016 2.48% 2.33%
Jun-2016 2.64% 2.48%
Jul-2016 2.72% 2.57%
Aug-2016 2.43% 2.46%
Sep-2016 2.59% 2.65%
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The data below can be saved or copied directly into Excel.

*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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Another word about the wage target (the shaded region on the graph above). The nominal wage target of 3.5 to 4 percent is defined as nominal wage growth consistent with the Federal Reserve’s 2 percent overall price inflation target, 1.5 to 2 percent productivity growth, and a stable labor share of income. As an example, if trend productivity growth is 1.5 percent, this implies that nominal wage growth of 1.5 percent puts zero upward pressure on overall prices; while an hour of work has gotten 1.5 percent more expensive, the same hour produces 1.5 percent more output, so costs per unit of output are flat. Nominal wage growth of 3.5 percent with 1.5 percent trend productivity growth implies that labor costs would be rising 2 percent annually—and if labor costs were stable as a share of overall output, this implies prices overall would be rising at 2 percent, which is the Fed’s price growth target.

So, what do I mean by stable labor share of income? Below I chart the share of corporate-sector income received by workers over the last three-and-a-half decades (most recent data available is July 2015). Typically, labor share rises during recessions because profits fall much faster than wages during downturns. Then, in the early stages of recovery, labor share falls significantly as profits increase much more rapidly than wages. Usually, labor share then rises again late in the expansion as labor markets tighten and workers regain the bargaining power necessary to secure wage increases. So far, it does appear that labor share has turned the corner, but has still not begun any significant or reliable rise following its long fall in the recovery from the Great Recession. The share of income going to workers is still far below where it was prior to the start of the recession and below even where it was at its lowest point in the 1980s and 1990s business cycles.

Nominal Wage Tracker

Workers’ share of corporate income hasn’t recovered: Share of corporate-sector income received by workers over recent business cycles, 1979–2016

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 75.7%
Apr-2015 75.5%
Jul-2015 75.8%
Oct-2015 76.7%
Jan-2016 77.5%
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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A tighter labor market should eventually lead to stronger wage growth and a return to pre-recession labor share of income. It’s clear that we are not there yet. And, the jobs report on Friday will likely reinforce that fact. For that reason, the Federal Reserve has been doing the right thing, and should continue to resist raising interest rates.