What Will Finally Lift Wages for Middle Earners

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(Bloomberg View) -- Over the past few years, I have consistently argued that wages were on the verge of moving higher. Earlier this year, we looked at how increases in state and city minimum-wage laws were driving the wages of the lowest-paid decile of workers higher. Today, we are going to look at some of the factors driving the middle of the pay scale higher. At a later date, we can analyze what has been responsible for gains driving the top of the pay scale.

The current economic environment — with increased hiring but without much wage growth — has been developing since the great financial crisis ended. We continue to read stories anecdotally about pockets of wage gains in certain industries or areas. (Look at what rising competition is doing for forklift drivers' hourly wages, in Bloomberg Businessweek.)

But to understand what might happen with wages over the next 12 to 24 months, we need to consider the full spectrum of employment data. To get a richer sense of the state of the labor market, let's review five data points.

Unemployment rate: The gradual recovery since 2010 has led to a tight labor market, as unemployment fell from 10 percent to 4.1 percent. If the unemployment rate chart were a stock trend, every investor would want to be short it. 

Under normal circumstances, 4.1 percent would be full employment. However, these are not normal circumstances. Recoveries after a credit crisis are different from the normal cyclical recession recoveries (see e.g., this and this). Those differences manifest themselves in many ways, including delayed retirement and (I suspect) increased number of former workers on disability.

Labor-force-participation rate: The civilian labor-force-participation rate peaked in the 1990s, and has been falling steadily ever since.

There are many factors that have been driving this lower, including demographics. The gender differential is noteworthy: For men, labor-force participation began moving steadily lower right after World War II around 1948; for women, it peaks around 1999, started drifting lower and then really took a leg down after the financial crisis.

After that crisis, many frustrated workers decided to leave the labor force rather than accept a significantly lower-paying job. These folks are not retired or on disability, but simply become NILFs ("not in labor force"). There have been recent signs that they are coming back into the labor pool.

Quits rate: This technically measures the rate at which people leave one place of employment for another. What the quits rate really measures is employee confidence. It includes their expectations of getting a better-paying job, or finding employment with better benefits or working conditions. Individually, it is their subjective reflection of the state of the economy, a self-assessment of how scarce and therefore valuable their skills and experience might be. Collectively, it is an overall confidence measure.

After bottoming in May 2009 at 1.3 percent, the quits rate has gradually improved, and now sits at 2.2 percent.

Job openings and labor turnover: This is the availability of unfilled jobs in the economy. About 90 percent of the openings are private companies, while about 10 percent are government (of which a little more than three-quarters are state and local).

As the economy has recovered, this data series has steadily improved: It bottomed at 2.2 million positions in July 2009, up to the most recent reading in December 2017 of 5.8 million openings. That is a lot of jobs that have not yet been filled.

Job-openings-to-unemployment ratio: This is the big one: We take the number of unemployed people — the folks without jobs but who want one — and compare it with the total number of job openings. (You can play with the data at FRED or BLS.) What this creates is the job-openings-to-unemployment ratio, which is quite revealing about the overall state of the labor market — with big implications for wages, especially in middle- and upper-middle-income employment.

As the crisis came to an end in July 2009, there were 6.6 people looking for work for each available job opening. Competition for jobs was fierce. Employers did not need to compete on wages, benefits, working environment, 401(k) match, stock options, etc. With employees just happy to have a job — any job — there was little upward pressure on wages.

Over the ensuing years, more workers found work and businesses created more new jobs — but not in equal numbers. Although both sides of this ratio saw improvement, they did so at differing rates. Today, there is but 1.1 unemployed person looking for a job for each opening.  

This changes the dynamics between employers and new hires. In fact, skilled employee scarcity changes the power so much so that companies have to raise the salaries associated with open positions just to get tenable candidates to apply.

While globalization and technology have kept a cap on wage gains for at least three decades, we might be on the verge of a significant improvement. So long as an imbalance exists between the number of new job openings relative to the number of people looking for work, wages are likely to begin and continue to rise.  

We will find out next week whether wage gains are accelerating, when we get a clean Employment Situation report unaffected by hurricanes or seasonal disturbances.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

©2018 Bloomberg L.P.

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