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Jobs are rebounding. Why are wages stagnant?

Mitchell Hartman Jan 9, 2015
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Jobs are rebounding. Why are wages stagnant?

Mitchell Hartman Jan 9, 2015
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Job growth and unemployment ended 2014 on a strong note. The monthly Employment Situation report from the Department of Labor showed the U.S. economy added 252,000 jobs in December, compared to a revised 353,000 in November, and the unemployment rate fell 0.2 percent to 5.6 percent.

December’s employment report also provides full-year measures of the labor market. Unemployment declined by 1.1 percent in 2014, while job-creation averaged 246,000 a month over the year. Approximately 2.95 million jobs were added in 2014, the most since 1999.

However, average hourly wages fell in December by 0.2 percent after rising in November. Wages were up 1.7 percent for the year. That is very close to the multiyear inflation trend for consumer prices in the economy, says Elise Gould of the Economic Policy Institute. “Once you look at inflation, which has been around 2 percent, inflation-adjusted wage growth has been around zero for the last five years,” she says.

Standard economic theory predicts this situation will produce more wage inflation. If the economy is creating a lot of job openings, and unemployment is falling, employers should be worried about finding enough people with the right skills to hire. So they should offer more money.

“If these factors are not enough to keep the economy growing with rising wages,” says Bernie Baumohl at the Economic Outlook Group, “then we really do have to go back to the drawing board and revisit everything we know about how economies work.”  

Baumohl is convinced this scenario will unfold later this year: Once labor shortages really settle in and companies can’t meet demand in the economy, they will raise wages to attract good employees.

Conservative economist Peter Morici of the University of Maryland disagrees. “So many people have dropped out of the labor market,” he says. “If wages started rising again, they would return. So there’s really  this large contingent supply of labor.”

Gould estimates there are as many as 6 million potential workers who have dropped out of, or never entered, the labor market because of the poor economy who would be ready to work if jobs were available. They create a shadow reservoir of potential workers, she says, helping to keep wages down and increasing the bargaining leverage of employers. 

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