Why so little upward wage pressure?

One striking feature of the Thursday labor market report was the mix of declining unemployment — now down to 5.3 percent — and continuing sluggish wages, not to mention low rates of price inflation; read Neil Irwin.  Normally we would expect all the demands for those new hires to boost wages more.  What is going on?

I sometimes hear it argued that there is a good news aspect to this development, suggesting that the absence of wage pressures indicates there are many more people to be hired.  I wonder if this argument makes sense.  If we don’t observe a worker willing to take a job for current wages, how is that a cause for optimism about future reservation wages for those same workers?  I would think it implies some slight pessimism about whether those individuals will end up working again.  I’m not sure those workers are going to be worth so much more in the market anytime soon.

Just to jog your memory, the data do not indicate much of a stable Phillips curve.

Alternatively, you might think the employment of those remaining unemployed workers is constrained by demand side forces.  I find that unlikely at this late date in the recovery but even so, this demand side hypothesis also gives no particular reason for optimism, given a very conservative Fed.

Liquidity trap models do not explain why the rate of price inflation continues to be pretty much where the Fed wants it to be, and thus they also do not explain this constellation of market forces.  There is too much labor market recovery going on.

I find the most plausible explanation to be a version of The Great Reset.  A lot of workers have been revalued by the market downwards, but most incumbents are not taking pay cuts in real terms because they have insider power.  New hires, however, are not granted equally favorable terms.  If wages are steady as new hires pick up, this is in fact upward pressure relative to the counterfactual that otherwise those wages would be falling.  Flat wage are indeed what “things heated up” looks like, and it’s a good thing we had that gas price decline to bump real wages up just a bit.

On the whole, that’s not good news either.

Comments

As usual, Control-F for "immigr" brings up nothing.....

Unless your going to hire a ton of legal immigrants, their impact on establishment data is low.

If you have the numbers, do share. I'd like to know exactly how many immigrants it takes to have this kind of an impact on the labor market, in your opinion.

---suggesting that the absence of wage pressures indicates there are many more people to be hired

A few hundred million Chinese and Indian, yes.

We've been outsourcing for a decade or so now. Pretty much everything that could go is already gone.

I wouldn't be so sure. Think something like this: is it cheaper to replace the dishes with cheap imports than to pay someone to wash them? We are running into very surprising low cost goods that have made service and repair uneconomic. This isn't walmart lawn mowers, which crossed that line more than a decade ago, but commercial appliances. US manufactured units cost to the customers were in the $3-4k range, and to rebuild was a third of that roughly. Now cost to customer is around $1700, so they don't get rebuilt. Trash it and buy a new one made somewhere else. It will happen even quicker in other industries and settings with the implementation of different ways of doing things that removes the complexity and cost of installation.

To train and keep technicians who can do this stuff costs money, but we walk away from lots of things we used to do because of inexpensive imports.

Good jobs face these constraints right now, and if the labor costs increase they either will be done elsewhere or won't be done at all.

Sorry, there is upward wage pressure right now. Stop looking at flawed stats that look at nominal growth. Lets also notice the effect that losing higher paying domestic energy jobs had on wage growth by increasing lower wage service sector jobs.

The fact wages didn't decline with the post-oil price decline, is indeed wage pressure.

Cheaper job killing oil means demand for workers must decline except for the population increase caused by immigrants only in TANSTAAFL economics.

In free lunch economics, worker wages suck money into a blackhole and consumer cash comes from a whitehole, so cutting labor costs speeds consumer demand because less money is vanishing in the blackhole but that demand requires more workers paid next to nothing to deliver the infinite supply of imports to consumers with infinite money.

Workers are not consumers and no consumer is ever a worker.

In expensive lunch economics, neither the Fed nor capital exists.

The decline in the headline unemployment statistic is misleading as most of the drop in unemployment is coming from people dropping out of the workforce (twice as many as got jobs). Assuming that most of these people would actually like to be working (but aren't really looking anymore), there is not actually much improvement in labor demand..

http://www.businessinsider.com/labor-force-participation-rate-falls-to-38-year-low-2015-7

That seems to me to be a likely explanation: the unemployment figures lie.

Re: Assuming that most of these people would actually like to be working

Why make that assumption?

"Alternatively, you might think the employment of those remaining unemployed workers is constrained by demand side forces. I find that unlikely at this late date in the recovery ..."

Really?

The graph on http://www.philipji.com/item/2015-06-24/the-history-of-the-US-economy-in-one-graph shows that the gap between disposable personal income and consumption has not narrowed at all six years after the recession.

Great link. Thanks for sharing.

But the reason for the gap as described in that article (very good link by the way) is an increase in savings. Isn't that a good thing? Wasn't a major lament about the US that we were a nation of borrowers? Now we save more, that's good. Yes it affects demand and creates a sluggish economy, but it's got to be a good thing long term. It's part of the reset the global economy needed. America needed to save more, China to spend more.

What's so bad about muddling through? Beats a depression.

Since the mid 90s, core CPI inflation has averaged about 2%, but only about 1% of this is demand side inflation. The other 1% is from supply constraints in housing. Real housing consumption has been declining in real terms over this period, including during the supposed bubble.
So real wage growth, in demand terms, is fairly strong. It looks weak because Fed policy is really only producing 1% inflation and another 1% is chasing after a stagnant housing stock. This supply issue is somewhat deceptive. We have been forcing households to build a 5000 sq. Ft. tract home in Pleasanton instead of the 2000 sq. Ft. Condo they would have preferred in San Francisco. We are replacing intrinsic location value with lumber and gypsum. ( Now we aren't even doing that.) It's the equivalent of leaving readily retrievable minerals in the ground. Maybe a similar story can also be told of strong nominal wages being squandered on health care and educational inefficiencies. Inflation of discretionary expenses outside these areas is very low.

The problem has little to do with weak labor markets, or wage growth relative to price levels outside these sectors.

This sounds nuts to some people, but a lot of folks prefer a fully detached home to a nice condo. Don't get me wrong, it's nice to have a Trek cruiser, a gym membership, and a noodle house on speed-dial, in walking distance to everything a childless person might need, but on the other hand, it's also nice to play in the back yard with a couple of rowdy kids. Just two very different worlds that are not good substitutes for each other.

That came out snarky, and I did not intend it to be. Sorry.

What you say is true, RP. But there are all types, and it is the dense multi-unit housing that is supply constrained. Shelter inflation has been concentrated in rented housing in the major metro areas for the last 20 years, with little supply response.

Thanks. Great point.

Wow not a single reference to immigration and / or free trade (especially given the concentrated nature of the sluggish wage segments that are directly impacted by one or both). The mood affiliation is getting ridiculous.

That said, otherwise a great post as always by Tyler

Or robots or algorithms

Every time I think I've grasped the full extent of Tyler Cowen's stupidity, I'm proven wrong.

Why is there so little upward wage pressure ? Gee, maybe because NGDP growth is VERY LOW ?

If you find that hard to grasp, you're a moron.

But, why is NGDP growth low?

It would appear that Daniel subscribes to the "NGDP answers all questions" school of macroeconomic thought.

The Scott Sumner bubble continues to grow unchecked.

It would appear you are a moron

Guilty as charged, and happy to admit it. I have a lot to learn, that's for sure. How about yourself?

Because you are a moron, obviously.

Oh, of course, it was in the original comment all along...

The number of new jobs doesn't even absorb the increase in population every year, so why should wages increase if supply outstrips demand? Why are demographics never considered?

Because it is too depressing to report the truth

Cowens' explanation reminds me of Larry Summers' Okun Lecture in 2008 at the outset of the crisis. Stuck in the conventional analysis, Summers attributed the crisis and economists' failure to see it coming to lurking inflation hiding in the background because economists like himself (thank you very much) had overcome the Phillips Curve dilemma. No, Larry (and Paul and Tyler et al.), business cycles ain't what they used to be. Sure, inventory controls are far better than they once were, but that explanation conveniently fits into the conventional analysis. What's different today is what drives economic growth, or what is considered economic growth, and that is rising values of assets rather than overzealous producers contributing to a "general glut". Of course, there are so many views among economists that it's impossible to distinguish the orthodox from the heterodox. Of stated another way, if Newton had been an economist, we'd still be debating whether it was an apple or an orange that fell from the tree.

I'm an economist and I say it was a pear. Or maybe a plum. Anyway, certainly not a peach.

Who says irony is dead. I'm a lawyer (I shuffle papers for a living), and I appreciate a good lawyer's joke. All economists should be like you and take themselves less seriously; indeed, we'd all be better off if we took economists less seriously.

Immigration, offshoring. Maybe side effects of automation as well.

Last company I was at hired only top-decile or so experienced workers, typically in their late 20s to mid 40s.

The salary and benefits were good but not great. They paid about 15p over entry-level companies.

In 9 offers, not one negotiated for higher pay - just accepted because the company is like a real one with a salary, benefits, and full expense reimbursement. This has become exceedingly rare since 2008.

You conservative types have been running the economy so well that these types of jobs - with a healthy base salary, benefits, and reasonable working conditions are so goddamned rare that they are immediately snatched up.

Workers - including very good ones - know their role, shut their mouths, and generally are quick to grab ankles on account of "market forces"

"You conservative types have been running the economy so well"

Haven't paid much attention since 2006, have you?

You did Iraq, you did Bernanke, you are doing Huge Defense and Big Pharma, you wiped your ass with the 4th amendment. Always with tightly-reasoned logic that involved the use of the words "liberty" and "freedom" and biting the pillow for some corporate master or other.

That's a good observation Ben. Clearly, American "conservative types" are responsible for all the ills that have occurred in the last decade and probably forever. But, one question, how are American "conservative types" responsible for the economic conditions of the rest of the world, which is also performing poorly?

"you wiped your ass with the 4th amendment."

Yes, damn those conservative types!

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"Normally we would expect all the demands for those new hires to boost wages more."

Isn't that only true if the increase in employment is due to demand curve shifting rather than supply curve? Wouldn't most plausible explanation for rising employment and low inflation be positive AS shock [http://econlog.econlib.org/archives/2015/07/the_fed_shouldn.html], assuming output is also rising with employment? If output is not rising with employment, then explanation could be declining productivity [http://www.themoneyillusion.com/?p=29534].

Maybe our economy is just so bad at sorting people that it can't find things for people to do that it considers valuable. Or are you trying to suggest there are a surplus of people? If companies have these jobs why don't they send people out looking for suitable candidates? Explain Shanghaing to me. Why were people kidnapped to serve as sailors instead of paid higher wages?

Almost as if the Labor Department's employment statistics don't reflect reality!

I sometimes hear it argued that there is a good news aspect to this development, suggesting that the absence of wage pressures indicates there are many more people to be hired. I wonder if this argument makes sense. If we don’t observe a worker willing to take a job for current wages, how is that a cause for optimism about future reservation wages for those same workers?

I think there's a lot of instability here. A few months of 5.3% unemployment could see many workers returning to the labor market which would mean you could continue to enjoy increased demand without inflation. The 'reset' you talk about can happen in expecatations and self-esteem too. People unable to work for years now may have consigned themselves to living lower end lifestyles, perhaps mooching off parents or a breadwinner on the assumption they could never really get a job again. These people don't necessary need a higher wage to come back into the labor market and start filling out applications and sending out resumes again. They might just need to know that this time they can actually land a job.

“Normally we would expect all the demands for those new hires to boost wages more.”

Except, the decrease in the unemployment rate mostly expresses an increase in those who have dropped out of the labor market (no longer seeking work), and not increased demand?

The LFPR has fallen every single year since the recession *ended*.

If you add back the 3% of the labor force that has stopped looking for work since 2009, unemployment looks like 8.3%, not 5.3%.

If the headline number showed 8.3% unemployment, we wouldn't expect to see strong wage growth.

This is truth-y. But remember some of the LFPR decline is demographic (aging Boomers). I wonder how much of that 3% is.

These folks think it is half:

https://www.chicagofed.org/publications/chicago-fed-letter/2012/march-296

Thanks. Sounds right, not that I would know. So 'real' unemployment is maybe 6.8%, hence little wage growth. A sluggish economy still even at headline 5.3%. This is the new normal, and this is not great but not that bad either. Kind of Japan-ish.

Except that people who have dropped out of the labor force are, well, not in the work force. They don't exist as far as employers looking to hire are concerned.

Only to the degree they aren't willing to re-enter the work force. There are always plenty of marginal cases who would go back to work if presented with a good job offer.

Correct, we are talking about here only a few pecentage points of population to make all the differnece between a labor shortage causing rising wages and prices versus flat wages. The vast majority of people 'not in the labor force' could really be 'not in the labor force'. The question is of the 47% or so of the population currently not participating in the labor force, what portion of that is very close to participating? The bulk of that 47% could be too old, too sick, too unskilled or what not to ever be in the labor force. It only takes a few of them to produce a pool of potential labor force expansion.

I wonder if the skills gap has something to do with this?

Employers want to hire someone to do x, y, and z at $60k but can't find that person so they hire person to do x & y at $35k and another to do z at $25k. More people working but at lower wages. This does not necessarily contradict Tyler's story. Employers need a more productive labor force and rather than fire older workers with valuable skills they're hiring younger workers to fill in the gaps.

I tend to think the whole idea of a skills gap is overblown, but there does seem to be something to it.

How can wages still be stagant? We have seen low productivity growth and lots of claims of skill gaps.

Remember 2009 - 2010 the huge productivity boom? Well companies cut so back that they eliminated their 'labor' bench and on the job training entry level jobs. Now the economy is moving forward and productive employees are retiring/moving up/moving on to new positions and they don't have the 'farm system talent' to replace them like they historically have done.

I am hearing a ton on a coming Diesel Mechanic shortage and wonder why companies are training them for the positions. (Given Diesel Mechanic are not just trained by schools.)

The Great Recession was a great opportunity for companies to get rid of non-productive losers that weren't earning their paychecks. Companies have discovered that their bottom line is better when they're not paying the freight for goldbricks that are a cancer in the business organism. Maybe it's different in the economic sphere of academia where everyone is just too busy to notice but, like everyone else, they're surrounded by bozos going through the motions. The unemployment rate should be even higher than it is but employers have to settle for what they can get.

I still maintain that a rise in the lending cost might trigger both inflation and wage gains. I think the prime rate has become the cause, rather than the result.

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