The Jobs Report Said Wages Aren't Growing And There Might Be Nothing Wrong With That
It was admittedly aggressive (welcome to blogging!), but I've been thinking throughout the day.
What if it isn't true at all?
Sure, wages are flat, but what if there are basic structural reasons for this and we (meaning me and my camp) should all just chill out on this?
UBS's economics research team tried their hand at explaining it in a note today:
We have a number of theories about the softness in average hourly earnings growth, none of them quite satisfying.
- There's some downward bias to average hourly earnings from changing demographics, with the average age of employees no longer rising as quickly as they were (see chart). Average age stalled in 2012.
- Stalled wages may also be an artifact of long-term unemployment. The Fed has long been worried that those out of the labor force for an extended period would see a staling of skills that left them less likely to find employment. Over the past year, those long-term unemployed have been returning to the workforce in force-rapidly enough to offset the demographic drag on participation. "Almost two-thirds of the decline in the level of unemployment in 2014 occurred among the long-term unemployed", according to the Labor Commissioner. These returning workers probably earn less than they did and less than others of equivalent age or experience.
- The Q3 employment cost index (ECI) accelerated noticeably because of incentive pay that isn't being captured in average hourly earnings. Perhaps that continues-and the extending workweek would likely add to that incentive pay.
- The ongoing wage softness in some way matches the softness in inflation-and with energy prices now headed down, the slowing in December alone doesn't do damage to purchasing power.
The fourth bullet point is more of an effect than a cause, but the first three are plausible explanations for a softness in wage growth.
UBS isn't alone on its demographics theory, either. Guillermo Roditi Dominguez of New River Investments has been a vocal critic of paying attention to falling wages in the BLS report for a while.
The basic idea behind this is that the population in the labor force is changing (boomers are retiring, younger workers, who necessarily make less at the moment) and therefore the total wages being paid out to workers is declining, even as workers are seeing more in their paychecks.
Dominguez sent me a couple of charts that back up his argument. The first shows taxes withheld from people's paychecks, which is a function of how much they are getting paid.
