One Man’s Opinion: Will The Economy See Stronger Wage Pressures Going Forward?

92835431The latest non-farm payrolls report showed the US added 248,000 jobs in September. Yet the lack of wage inflation has been a real puzzle and the only missing-piece in the jobs report, said Alan Krueger, a Princeton University economics professor and former chairman of the White House Council of Economic Advisers.

The economy is likely to witness higher wage growth going forward, especially as the unemployment rate continues to decline. Employers have been reluctant to raise wages though they are likely to come under more pressure to do it.

Also, this probably is the best time to raise the minimum wage. In the 1990s, when the economy started to heat-up, the federal government raised the minimum wage that helped in lifting overall wages. With job growth holding above the 200,000 level, there is not much risk to employment at this point in time, he argued.

Asked what precisely explains the lack of wage growth, Alan said the data is surprising. Production non-supervisory wages rose 2.5 percent in the 12 months through August, but fell to 2.3 percent in September. The employment cost index, which includes wages and fringe benefits, is probably the best indicator of wage pressures. That was up 0.7 percent in the second quarter and another reading on the index would be informative.

The labor-force lacks bargaining power although the unemployment rate has been falling steadily. The labor-force participation rate has been declining steadily over the years because the population has been getting older. Also, people who exit the labor force tend not to come back when things pick up, he explained.

The long-term unemployed, who don’t return to employment, are probably the people who made more money while people who are retiring, are probably older and better-paid people than the new entrants. Asked if that explains the lack of wage pressure, Alan answered in negative.

The age structure of the labor force indicates the economy is moving more and more toward where the people are at the peak of their earnings. It will be difficult to say unemployment is coming down for the wrong reasons, particularly when the economy is adding more than 200,000 jobs on average every month. The unemployment rate is coming down for two reasons. One, the unemployed are finding jobs, particularly the short-term unemployed. Secondly, more and more people are retiring because they can afford to retire, which is a positive thing. Additionally, the long-term unemployed are getting discouraged due to lack of job prospects, which is an unfortunate, but natural progression of the economy at this point, he argued.

Asked if Fed chair Janet Yellen is likely to put more emphasis on the jobs report compared to other economic indicators, Alan said all economists attach more importance to employment data. It’s noisy and tends to send out different signals although the September data indicates both households and establishments showed pretty strong job growth.

Unemployment-insurance claims are also an important indicator of the job-market health and those weekly numbers have been looking better and better off late. Nearly every indicator paints the picture of an improving jobs market and the only missing piece is the lack of wage growth. There may be some lags in terms of wage growth with the economy recovering and stronger wage inflation would be a healthy development, he concluded.

You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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