(Bloomberg Opinion) -- U.S. workers have finally been seeing some decent raises in recent months, after suffering through nearly a decade of meager wage gains. Unfortunately for them, this might be as good as it gets.
The behavior of wages has long been a central mystery of the U.S. labor market. Even as employers kept hiring and the unemployment rate fell to multidecade lows, the demand for workers failed to translate into higher pay. Lately, though, things have started to move. Year-over-year growth in average hourly earnings reached 3.4 percent in February, roughly matching the pace that prevailed ahead of the last recession, before retreating a bit to 3.2 percent in March. Here’s how that looks:
Could wages accelerate further? It wouldn’t be unreasonable to expect some payback after all those years of relative stagnation. Yet considering one of the most important contributors to wage growth — workers’ productivity — it doesn’t seem likely to be all that big.
In the longer run, two factors determine how much employers can and should pay. One is inflation: Wages must keep pace with prices lest workers end up worse off. The other is productivity: The more employees produce each hour, the more companies can afford to pay them. The sum of the two — inflation plus productivity growth — sets a sort of limit on how fast pay can increase without causing economic problems.
So what’s the limit? As of December, the Federal Reserve’s preferred measure of inflation, at 1.95 percent, was very close to the central bank’s target of 2 percent. It could go a little higher, but a lot would be undesirable and attract a justified response from the Fed. Meanwhile, productivity growth remained pretty slow, up just 1.77 percent from a year earlier. Altogether, that adds up to about 3.7 percent — a low ceiling that wage growth was already close to hitting:
In other words, greater gains in workers’ living standards will require faster productivity growth. To some extent, higher wages might provide a boost of their own. Beyond that, though, it’s hard to see where the growth will come from. Corporate tax cuts haven’t resulted in the kind of investment that could drive a breakthrough. President Donald Trump hasn’t followed through on promises of infrastructure spending – which, done right, could make the whole economy work better. And his immigration policies have not been conducive to bringing in highly skilled foreigners.
That leaves workers to hope for a miracle. It could happen, but don’t count on it.
Companies typically don’t pass on all productivity gains to workers. Some goes to shareholders in the form of added profits.
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Whitehouse writes editorials on global economics and finance for Bloomberg Opinion. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was founding managing editor of Vedomosti, a Russian-language business daily.
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