One Man’s Opinion: Are Wages Stuck Because Of Slack In The Labor Market?

92835431The latest jobs report showed US labor force participation rate rose to 59.2 percent in October, the highest since July 2009. Yet the US economy needs to add another 5 million jobs to really reach the pre-recession employment levels, said Edward Lazear, a professor of economics at the Stanford University.

The population has grown significantly since before the recession and the easiest way to explain this phenomenon is to see the pre-recession numbers; 63.5 percent of working age population had jobs before the Great Recession. The employment-to-population ratio, i.e. number of people employed relative to the working age population, went up to 59.2 percent from 59 percent, which is way below the pre-recession level.

The US unemployment rate at the peak of economic activity was actually at 4.4 percent. So even if one considers the unemployment rate, which is not a very good indicator of the labor market, the economy is still a far-cry from where it should be. In order to keep up with the population growth, the economy needs to add about 120,000 jobs a month. Right now, the average is about 220,000 a month, which means the economy is gaining about a 100,000 jobs every month, and it should take about four years to reach where it was before he noted.

The labor force participation rate has been dropping since 2000 and actually shows a secular downward trend that has got nothing to do with the real economy. Asked to explain, Ed said the labor participation rate will never rise to 63.5 percent, but it should rise to 61.5 percent and that’s what the five million jobs come from.

Taking demographics and all the other trends in the economy into account, participation rate should rise to 61.5 percent. The economy is unlikely to hit the 63.5 percent level ever primarily due to the change in demographics, he explained.

Asked if growth in the economy alone is sufficient to drive the participation rate higher, Ed answered in affirmative. If the economy continues to about 220,000 jobs every month, it will take four more years to get there. There are structural changes in the economy and the labor market, but they are long term patterns and they have been going on forever.

Changes in manufacturing – in the fifties there were changes in unionization, changes in female labor-force participation etc., and they go back a long way. Very few of those are actually related to the recession itself and the recovery. There will be a change in the economy, but whether it will get the same jobs as before certainly remains questionable, he argued.

Asked if the structural changes are the reason why Americans are not witnessing wage growth, Ed answered in negative. When an economy recovers from a recession, the first thing that happens is the jobs come back. The second thing that happens is wages start to grow. Even in the late nineties when there was a boom-economy, for a long period of time in the mid-nineties, there was no wage growth though there was a job growth. Wages will eventually grow, but it requires a tight labor market. The current lack of wage growth indicates the labor market is still not tight, he noted.

Part-time employment has increased in anticipation of employer mandates before the launch of “Obamacare,” according to Ed’s research. Asked to comment, Ed said there are seven million workers employed part-time right now, which is about four percent of the labor force. That’s abnormally high. Whether that’s the result of “Obamacare” and the attempt to evade the restrictions on employers associated with high hours, certainly remains to be seen. But the leading explanation for so high part-time employment remains Obamacare, he argued.

Asked how would he correlate the part-time employment rate rise with Obamacare since it is yet to come into effect,  Ed said people set up their labor force in anticipation of what they expect to see in the near future and the near future is now. Obamacare is the leading candidate and there’s no great deal of evidence one way or the other on that particular question, 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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