Morning Report: Why there hasn’t been much wage growth (yet) 6/4/18

Vital Statistics:

Last Change
S&P futures 2743 9.7
Eurostoxx index 388.45 1.55
Oil (WTI) 65.49 -0.32
10 Year Government Bond Yield 2.91%
30 Year fixed rate mortgage 4.54%

Stocks are higher this morning on no real news. Bonds and MBS are flattish.

We should have a relatively quiet week coming up, with not much in the way of data and no Fed-speak.

Friday’s jobs report was pretty much a Goldilocks report as far as the markets are concerned. Strong job growth, with respectable (but controlled) wage growth is exactly what the Fed wants to see. Tomorrow, we will get the JOLTS job openings report, which should show job openings of around 6.5 million.

Academics are scratching their heads trying to figure out why wage growth is so slow with unemployment below 4%. With the economy at “full employment” at least according to the unemployment numbers, how can so many jobs still be created? And if unemployment is below 4% and we are at a record number of job openings, where is the wage growth?

First of all, the jobs report had wage growth at 2.7%, and the core PCE inflation rate is 2%. So, we do have inflation-adjusted (i.e. real) wage growth. Second, productivity is a puzzle. It has been low for a decade, and part of the issue is that productivity is notoriously hard to measure, especially when valuable goods are “free” or hard to measure. Think of social media, which has all sorts of entertainment value and productivity enhancing value, yet is supposedly free. Yes, you are paying with your data, but what is your data worth? Productivity calculations need a dollar value. Productivity has been low, but there is a huge uncertainty range around that number.

I think a huge part of the issue is the fact that the unemployment rate excludes anyone who has been unemployed over 6 months, and there is a huge reservoir of workers on the sidelines who want to return to the labor force. Companies know this, and all they have to do is relax their standards (i.e. hire people who have been out of the labor force for a while) and they will fill their positions. At the end of the day, this is a numbers game. The employment-population ratio has been steadily increasing since 1970 as women have entered the workforce. It peaked in 2000, bottomed after the Great Recession, and has been steadily working its way upward. The demographic factor (retiring baby boomers) is probably getting overplayed here, as most people no longer can retire at 65 (and there really is no reason why most can’t continue to work).

Leftist economics are arguing that employers are somehow colluding to keep wages low, and therefore are suggesting a panoply of policy levers designed to artificially force up wages and increase unionization. Aside from non-competes in the rarefied air of Silicon Valley engineers, generally this doesn’t happen – cartels are almost impossible to make work (witness OPEC) and there are simply too many employers who don’t compete with each other to coordinate it, even if they wanted to.

Instead of jumping to the “market failure” conclusion, the answer is that there is more slack in the labor market than the numbers suggest. There may be a mismatch of skills, where there is high demand in areas where there aren’t a lot of available workers (skilled trades, data scientists) but overall the employment population ratio doesn’t lie. The last time we saw decent wage growth was the 90s, where the employment-population ratio was around 63%. The latest number was 60.4%. That difference in a population of 326 million is about 8.5 million jobs. That is about 3 year’s worth of job growth, without population growth which is still measurable at 0.7% a year. Even if you take into account the 6.5 million job openings, you still have probably 2 million extra workers on the sidelines. IMO, that is your answer about wage growth, not monopsony of collusion, which is just a specious argument for more government intervention in the labor markets.

Chart: Employment-population ratio.

employment population ratio

House price appreciation continues apace, and between rising price and interest rates, the monthly house payment on the median house with 20% down has increased by $150 a month, according to Black Knight Financial Services. Income growth at 2.7% is not going to keep up with home price appreciation, which is running at around 6% a year. When rates were falling, we were able to paper over that issue with lower mortgage payments, but that game is over. Housing starts are still way too low, and that question is even more perplexing than wage growth.

Note that private equity is now building homes for rent, which should alleviate some of the supply problem. It was only a matter of time until new entrants saw the opportunity that the big builders have been sitting on. Politicians are getting sick and tired of the lack of housing supply (especially at the lower price points).

Friday’s jobs report reversed the Euro-driven drop in the June Fed Funds futures. At one point, they were predicting a 81% chance of a hike. Now it is back up to a near certainty. The December futures are predicting a 40% chance of 4 or more hikes this year and a 60% chance of 3 or less.

12 Responses

  1. Good article on the left’s control of language and how to deflect it.

    Liked by 1 person

  2. This is a pretty good piece on the Trump Obstruction of Justice arguments:

    “Is it possible for a president to obstruct justice in the context of performing his constitutionally assigned role, that is, using only otherwise valid exercises of his constitutional powers?”

    Liked by 1 person

  3. BTW, it is worth noting the irony of SCOTUS’s Masterpiece Cake Shop ruling. In attempting to enforce what are essentially thought crimes against the baker, the Colorado Commission’s ruling was overturned by SCOTUS on the grounds that the Commission’s ruling was compelled by…wait for it…improper thoughts!

    Liked by 1 person

    • He lies and lies and lies, of course; but his success at delegitimizing mainstream media has helped to build these lies into a narrative of triumphalism that more and more Americans are prepared to believe.

      I would argue that Trump is only successful in “delegitimizing mainstream media” because the mainstream media is so awful, and has so long received legitimization it did not earn and does not deserve.

      In the end, most people just give in to the lie completely. It’s easier than constantly resisting a malignant, relentless narcissist.

      While not untrue, Sullivan–with good reason I’m sure–avoids the topics of how much the Democrats, the media, and the political left is aiding Trump in this with their “speaking truth to power”. And how much they did to create the environment where Trump would win in the first place, especially in terms of immigration policy, etc.

      I’m on record as liking Obama as president, in many ways more than I liked Bush. But Obama helped lay the groundwork for Trump as well. Apologizing for America, even looking like it–not a good idea. Too much pretending that the “guns, god, and gays” people were old and stupid and dying so no need to placate them. But if Obama made some missteps that helped give us Trump (in retrospect), HRC and her campaign dove headfirst into an active campaign to lose and propel Trump into the presidency.

      Pretending that that did not happen is not going to reduce Trump’s strongman appeal. Possibly the contrary.


    • In this view the default condition of modern times is a process of gradual movement towards liberal values. The election of Donald Trump, the ascent of Xi Jinping to president-for-life in China, Vladimir Putin’s elective autocracy and Erdogan’s neo-caliphate are blips; pauses in an advance that has an irresistible long-term momentum.

      I think this is true, and I can’t imagine any long reading of history that doesn’t 100% affirm that this is true.

      Or will be, until a meteor kills everybody. Or zombies.

      It doesn’t mean 10 years from now is going to be more classically liberal than today, or 20, or even 50.

      That we will ever reach some utopian nirvana where the modern leftist or classic liberal will be perfectly happy and satisfied in every way . . . well, that will never forkin’ happen. People will always be at odds.

      If we reach a future where technology makes it possible for anybody to have literally anything and everybody is, by today’s standards, incredibly wealthy, there will be raging battles about the inequality between the super-duper-rich and the merely super-rich that make up most of society. People will still break up into tribes and argue about who is good and who is evil. There will always be backlashes and progress.

      The other problem being that whatever one defines as progress, they never see enough of it, no matter how much there actually is. Whatever they define as regression, they see plentiful amounts of it, no matter how little there is compared to progress. Trump is a strong-man president who lies and harasses a press that, for the most part, still gets better than they deserve. As awful as that is, gay people can still get married. We’re still moving forward to ever more progressive government run (or at least paid for) healthcare. There are a thousand ways in which the country and the culture is more progressive and modernly liberal than it was 10 or 20 years ago, let alone 60 or 70 years ago.

      But good article. I agree with John Gray about a lot of stuff.

      I am dubious about a new authoritarian era (outside of the Middle East and former totalitarian states) however. I expect any authoritarian movement amongst the western democracies will be relatively short, and only some ideas (particularly regarding limiting immigration) may endure.


  4. RIP Dwight Clark. I remember listening to the game where he made “the catch”, I was in the car with my dad and we nearly got into a wreck because we were staring at the radio. That memory has stated with me for some reason, I can still conjure it up today.

    The Montana era 49’ers were an amazing team.


  5. Just saw a car commercial w/ Motorhead’s Lemmy song Sympathy For the Devil.

    I’m officially old.


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