Jobless claims reach 40-year low. Is wage growth next?

Jul 23, 2015
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Jobless claims reach 40-year low. Is wage growth next?

Jul 23, 2015
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New jobless claims fell to 255,000, their lowest weekly level since November of 1973, the U.S. Department of Labor said Thursday.   

One would expect that this is an indication of labor market tightening. Fewer people getting laid off, fewer people in line to do your job, possibly for less than you. There should, theoretically, be less restraint on workers’ demands for a raise.

“It’s all about supply and demand,” explains Harry Holzer, professor of public policy at Georgetown. 

“The tighter the labor market, the harder it is for employers to attract or retain the workers they want or need, so they have to raise wages.”

But hourly wage growth data don’t seem to be bearing that out yet. 

Wage growth has sat at around 2 percent for the past five years, says Elise Gould, senior economist at the Economic Policy Institute. 

“That’s pretty slow,” she says. “That’s far below any sort of reasonable wage target that would be consistent with the [Federal Reserve’s] inflation target of 2 percent and productivity growth we’ve seen. That should put wage growth more like 3.5 to 4 percent.”

The monthly wage data may not be telling the whole story, however. Gad Levanon, managing director of macroeconomic and labor market research at the Conference Board, says the average hourly earnings number can be skewed by changes in the composition of the labor market. 

“If there are more low paid occupations joining the labor market or if employment is growing faster in low paid positions, that would pull down the average paycheck increase,” he says.

Levanon looks at something known as the employment cost index, which looks at compensation while weighting the value of specific industries so it’s more of an “apples to apples comparison.” 

The most recent increase by that measure is 2.7 percent, and it has been growing faster than average hourly earnings since 2014. 

Levanon also points to the Federal Reserve Bank of Atlanta’s Wage Growth Tracker, which looks at wage growth among a consistent group of individuals over time. That measure of growth is 3.2 percent.   

 

These numbers are still not ideal, Gould says, but they may indicate that raises are coming in 2016, according to Levanon.

 

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