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Marketplace Morning Report

Employee compensation growth stalls out

Mitchell Hartman Jul 31, 2015
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The Labor Department reports that employee compensation — wages, salaries and benefits — increased 0.2 percent in the second quarter of 2015. The employment cost index increased 0.7 percent in the first quarter, and economists expected about the same pace of growth for the second quarter. The annual rate of compensation inflation was 2 percent in the second quarter, compared to 2.6 percent for the first quarter. Compensation for private-sector employees was unchanged in the quarter; compensation for government workers rose 0.6 percent.

A separate measure of employment income from the Bureau of Labor Statistics’ monthly employment situation report has shown hourly earnings increasing at 2 percent (the annual rate for June 2015), the same anemic growth rate as reported in the second quarter employment cost index.

These labor-cost measures inform an ongoing debate as to whether the job market has largely returned to health after the Great Recession or if it is still weak, leaving behind millions of people who want to work or earn a better income.

Economist Ozlem Yaylaci at IHS Global Insight says the weak second quarter ECI report contradicts evidence of an employment market that has mostly returned to health.

“It’s a big shock,” says Yaylaci, “because we see employment numbers very solid month to month, and the unemployment rate has been declining. We are now close to full employment.” The unemployment rate fell to 5.3 percent in June.

Labor economist Jesse Rothstein at University of California, Berkeley says in such a positive labor-market scenario, it would be easier for people to find jobs and harder for employers to attract and hire qualified workers. He says employers could be expected to lower their requirements for job applicants and to offer new hires more training, rather than expecting them to have job-specific skills and capabilities when they apply.

“We’d also be looking for evidence that wages are increasing as employers need to pay more to attract workers to jobs,” Rothstein says. “We’re not seeing evidence of any of these, which suggests that we really are still in a situation with a lot of slack in the labor market.”

Rothstein believes there is a shadow labor pool that isn’t showing up in the standard unemployment data but is strengthening employers’ bargaining power and helping them maintain lower wages without suffering labor shortages. This shadow labor pool includes people who have dropped out of the labor force or never entered because of poor job prospects, but who might start job hunting if their prospects improved. Labor market slack is also fed by people working part time who can’t find full-time work, and people working in jobs below their training, education or experience level.

Yaylaci says this economic scenario worries Federal Reserve Chair Janet Yellen as she steers the Fed toward higher interest rates.

“She’s concerned because measures of the labor market, such as the unemployment rate, sometimes don’t measure the slack in the labor market correctly,” Yaylaci says. If that diagnosis is correct, the economy might not be strong enough yet to take the medicine of lower interest rates.

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