It’s not happening.
Last month, employers added a healthy 252,000 jobs — ending the best year of hiring since 1999 — and the unemployment rate sank to 5.6 percent. Yet inflation isn’t reaching even the Federal Reserve’s modest 2 percent target rate. And paychecks are barely budging. In December, average hourly pay actually fell.
Economists are struggling to explain the phenomenon.
“I can’t find a plausible empirical or theoretical explanation for why hourly wages would drop when for nine months we’ve been adding jobs at a robust pace,” said Patrick O’Keefe, chief economist at consulting firm CohnReznick.
Normally, with unemployment this low, the Fed would raise its benchmark interest rate to prevent inflation from spiking and the economy from overheating. Not this time.
As long as inflation stays consistently below its target, the Fed might feel pressure to delay a rate increase beyond midyear, when most economists have predicted a hike.
When the U.S. economy last enjoyed a similar hiring binge, in 1999, average wages climbed 3.6 percent, compared with 1.6 percent last year, according to the government.
So what explains consistently solid job growth without inflation? Here are four crucial factors:
The recession's lingering damage
Though the unemployment rate is back to a nearly healthy level, many other measures of the job market remain subpar. There are still 6.8 million people working part time who can’t find full-time jobs, up from 4.1 million before the recession. Each of those workers potentially competes with the unemployed for full-time work, thereby holding down wages. And there are 2.3 million people who have recently stopped looking for work, some of them because they grew discouraged about their prospects. Others chose to return to school or to care for relatives. That’s up from 1.3 million before the recession.
The end of long-term unemployment benefits, which provided up to 99 weeks of aid until they expired a year ago, may also be contributing, said Daniel Alpert, managing director at Westwood Capital, said. That’s because some of the unemployed have likely had to take lower-paying jobs and finding work therefore hasn’t improved their incomes or increased their spending.
Growing automation
What’s happened in the auto industry reveals much about how the economy has been transformed — and why a nearly normal 5.6 percent unemployment isn’t igniting wages. Sales of new cars last year reached 16.5 million, the best performance since 2006. But the number of autoworkers remains about 160,000 shy of pre-recession levels of more than 1 million. The reason: Emerging from the recession, automakers reconfigured factory floors and added robots to produce more vehicles from fewer plants and fewer workers. What’s more, the United Auto Workers union agreed to wage cuts in an effort to help General Motors, Ford and Chrysler. New hires started at around $16 an hour, about half of what longtime workers earn. Even longtime UAW workers haven’t had an hourly pay raise since 2007r.
Similar trends have emerged at other factories and in other industries. O’Keefe notes, for example, that retailers are selling more goods than before the recession yet still employ fewer workers.
Demographic shifts
Since the start of graduation season in May, employers have hired an additional 1.67 million college graduates — nearly 60 percent of all jobs added last year. In the past year, the number of 25-to-34 year-olds with jobs has climbed a solid 2.5 percent. Because so much hiring has disproportionately occurred in recent months, Wells Fargo chief economist John Silvia figures that wages might be held down because many of the newer workers are in lower-paid entry-level positions. Their influx cuts into average wages while simultaneously reflecting the strength of job growth. Dig a bit deeper and you find other age-based pressures: The number of workers older than 55 climbed an impressive 3.4 percent last year. But those employees likely maxed out their salary potential years ago and are unlikely to enjoy sharp pay hikes. The number of employed 35-to-54-year-olds — the age group most likely to be in their peak earnings period — rose less than 1 percentage point in the past year.
Weakness elsewhere
No matter how much the U.S. economy improves, American workers still face competition from billions of workers in China, India, Eastern Europe and elsewhere who weren’t part of the global economy a decade or two ago. That most of those economies, as well as Japan and the rest of Europe, are stumbling only intensifies the competition for jobs. Weak growth overseas has lowered interest rates and inflation — and therefore tempered pay growth — in many of the United States’ competitors. That means U.S. workers face continued low-wage competition.
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