Why is Pay Lagging?

With the unemployment rate at approximately 4%, the lowest since 2000, economists have been surprised by the slow growth in paychecks.  Historically, when that few people are unemployed, companies have had to pay up to attract workers.

Clearly, anecdotal evidence and government reports suggest that the U.S. is in a tight job market, yet pay gains do not appear to be consistent with the increasing number of help wanted signs and government unemployment data.

Recently reported, disappointing increases in average hourly earnings, approximately 2.5% for all of 2017 (barely outpacing inflation), are part of a stubborn pattern that is one of the mysteries of an economic recovery, now in its ninth year.

Several possible causative factors have been put forward by a variety of commentators whose conclusions tend to reflect their overall view of economic and political issues.  Some of the suggested causes include, declining unionization, particularly in the private sector, the lagging minimum wage, particularly at the Federal level, and sluggish productivity gains.

Perhaps the correct answer is, “none of the above.”  Throughout the current nine year period of economic recovery, workforce participation rates have been at record lows.  This may be a function of the way the government measures unemployment and the large number of potential workers who, for a variety of reasons, may be biding their time.

To the extent that more potential workers actually decide to enter the workforce, as suggested by February unemployment data, wage gains may continue to be modest in the near term.  Eventually, supply and demand will determine the path of paychecks.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA