As U.S. job growth continues, higher wages are on the way
I spent four days at a lodge on a remote lake in Maine recently. The location was idyllic, but I was in the company of 50 other economists, investment managers, and business reporters. And when you bring all those "experts" together, you can be sure the discussions are thought-provoking, with lots of friendly disagreements.
The hottest debate concerned when wages would start rising faster. My view is that unless the law of supply and demand has been repealed for the labor market, we are about to experience a sea change in labor costs.
The recovery from the Great Recession has been the slowest in 70 years. Growth of gross domestic product has been half the typical rate and it has taken twice as long to recover all the jobs lost.
It is no wonder so many people think we are still in recession.
The missing link in this recovery has been household income growth, which has lagged dramatically. Consumer spending makes up almost 70 percent of the economy, but income, adjusted for inflation, has increased by only 1.6 percent annually over the last four years. It is awfully hard to get strong economic growth - 3 percent or more - if household spending power doesn't rise quickly.
For incomes to increase faster, worker pay gains must accelerate. Accomplishing that is simply a matter of changing the supply-and-demand conditions. When unemployment rates are high, there are many applicants for jobs, so supply (workers) exceeds demand (employer hiring). Wages could be - and were - kept low.
The changing condition is accelerating job growth. This is reducing the number of available workers, altering the supply-and-demand relationship. Total payroll increases over the last six months were the greatest in nine years. Demand is rising.
Meanwhile, the unemployment rate dropped more than 1 percentage point in just one year. The decline in the unemployment rate is clear, but does it indicate reduced supply? Yes, as there are many other indicators that support the tightening labor market argument.
First, layoffs are slowing. The pace of new claims for unemployment insurance, about 300,000 a week, is normally seen when the economy is booming. The last time claims were at this level was during the dot-com and housing-bubble years of 2000 and 2006. The claims data are more consistent with economic growth in the 3.5 percent to 4 percent range than the current 2 percent to 2.5 percent rate.
The second improving indicator is the pool of people looking for work, compared with the need for workers. The number unemployed has fallen by about 1.7 million workers over the last year while job openings have surged by nearly 800,000. The number of unemployed workers available to fill the open positions has dropped to the lowest point since spring of 2008.
Finally, there is the willingness to quit a job. The idea of leaving a position, no matter how unhappy workers were, had been unthinkable. The number of people quitting their jobs is up 15 percent over the year and has surged more than 50 percent since the peak of the recession.
If people are quitting, they must know "something," and that "something" is that they can find a new job.
Just about every indicator of labor-market tightness is starting to flash red. So, why aren't wages rising faster?
In part, there is still some slack in the market. Firms continue to receive multiple applications for each job opening, so they don't perceive any need to raise wages to attract workers.
But there is also the possibility that business leaders simply refuse to believe they will need to increase wages anytime soon. It has been seven years since many have even thought about compensation issues, and few executives have wage increases as a major item in next year's business plan.
If denial is at work, it has significant implications for the speed of future wage increases. Workers who see job openings at other firms will start taking those positions. Employee turnover will accelerate, and if firms haven't planned for that situation, they will have to play catch up.
The result: Not only will new employee offers increase, but retention pressures will lead to greater wage and benefits gains for current workers as well.
The labor market is turning, and doing so rapidly. Full employment, which is roughly 5.5 percent, is quickly approaching. Soon, firms will not be able to simply pick and choose from a huge pool of qualified candidates. Shortages in occupations and across regions will start appearing.
The labor market works like every other market, and when demand starts outstripping supply, prices rise. Faster wage gains are coming, and probably sooner than most expect.
Joel L. Naroff is president and chief economist of Naroff Advisors Inc., of Holland, Bucks County.