Prices matter. They are the economists’ canary in the coal mine, an indicator of what is to come. Not necessarily as grim an indicator as when we have here a dead canary, but a pointer that cannot be ignored. When oil prices plummeted, analysts paid attention, hunting for causes and effects. Wages are the price of labor. So when the government reported late last week that average hourly earnings rose in April by a puny 0.1%, or three cents an hour, the failure of that price to rise suggested that still another price, the price of money, better known as interest rates, might be kept at close to zero by the Federal Reserve Board’s monetary policy committee. “The low rate of wage growth is, to me, another sign that the Fed’s job is not yet done,” Yellen revealed last year.
The economy did succeed in adding 223,000 jobs in April, after a meager 85,000 in March (revised down from the original estimate of 126,000). The headline unemployment rate remains at 5.4%; when workers too discouraged to continue hunting for work, and those involuntarily working part-time are included, the rate jumps to 10.8%, while the labor force participation rate remains virtually unchanged at a low 62.8%.
So the wage-rate canary is alive, but not chirping a happy tune as it looks ahead. If there were a bright light at the end of the tunnel, the price signal -- average hourly earnings -- would be rising at a healthy pace. The relatively stagnant price of labor is signaling that the rate of job creation is inadequate to absorb enough of the jobless workers to put upward pressure on wages. In terms more familiar to left-leaning economists, a large “reserve army of the unemployed” is preventing workers from pressuring employers to raise wages. Just as excess supplies helped drive down the price of oil, and surpluses have driven down the average of global commodity prices by 34% in the past twelve months to 2009 levels, so an excess supply of workers is keeping the price of labor from rising.
One source of that excess supply is rather obvious. The decision of the Chinese regime to enter the world economy so as to end generations of rampant poverty added over one billion workers to the world’s labor supply. Increase supply and, other things being equal, drive down price, as true in the labor market as it is in most other commodity and finished goods markets. Surpluses in those markets -- inventories of durable goods in the US are at their highest level since the government began publishing those data in 1992 -- are a main reason that inflation remains virtually non-existent despite easy monetary policy.
Then there is the problem of productivity. In the long run, wages closely follow productivity. Workers who can produce more in an hour, can earn more in an hour. But so far this year worker productivity has declined in America. The hourly output of goods and services of nonfarm workers fell 1.9% in the first quarter of this year, the second consecutive quarter in which productivity has fallen. That, notes the Wall Street Journal, “has happened only three times in the past quarter-century.” The economy is taking on more and more workers -- some 2.8 million more Americans are in work than at this time last year -- but businesses are not investing in the equipment, factories, software and other tools workers need to become more productive. If more output is needed, better to hire workers at wages that are not rising than to build plant: workers can be laid off if demand falls, investment in idle factories can’t easily be erased from the balance sheet. “Given that over the long run real wage gains and real productivity growth tend to be correlated, this does not bode well for the inflation-adjusted pay-checks of American workers,” Guy Berger, U.S. economist at RBS Securities, told the Journal.
Then there is the not-so-small matter of education. College graduates earn about $1 million more over their lifetimes than workers with only high school degrees. And workers without high school degrees who once held relatively well-paying jobs, with prospects of rising wages, are even more hard-pressed. The Brookings Institution reports that median earnings (the level in the middle of the wage distribution) of working men aged 30 to 45 without a high school diploma, fell in inflation-adjusted terms by 20% between 1990 and 2013, to $25,500 from $31,900 (in 2013 dollars). For similarly uneducated women the decline was not as steep, but still a significant 12%. Factory jobs for less educated workers have declined, and lower-paying ones in food service, cleaning, grounds-keeping and the like have doubled as a portion of all jobs held by this group. That structural change in the economy is unlikely to be reversed.
Finally, some economists add two factors to their lists of wage-depressing developments. One is the decline in the power of trade unions. Only 6.6% of private sector workers now belong to trade unions, compared to 20.1% in 1980 and 7.6% as recently as 2008. Another is the decline in the real level of the minimum wage. Whatever their effect on employment in the longer run, it is arguable that the drop in union membership and the decline in the real value of the minimum wage have contributed to the relative stagnation in average wages.
The bright spot for workers comes from anecdotal evidence that competition for them is heating up in the low-paying food services and big-box retailing sectors. McDonald’s and Walmart are not eleemosynary institutions. So their recent decisions to raise wages is surely an indication that any surplus in that section of the labor market is being whittled down. And job-hopping by young, skilled workers suggests the same is true at the top end of the labor market. Workers aged 20-24 now stay in their jobs for an average of less than sixteen months, compared with an average job tenure of 5.5 years for workers 25 years and older.
Still, data trump anecdotes at the Fed. And the price of labor is the most important canary in the Fed boardroom. Until it chirps loudly and happily, the price the Fed sets on money, interest rates, will remain somewhere close to zero.