Labor Shortage Equals Low Wage Growth?

More jobs and less available people should portend better pay. Everyone knows that when demand is greater than supply, the cost of the supply will rise until equilibrium is reached. That’s certainly the case with housing these days as the record low inventory of homes can’t satisfy the demand. As one would expect, housing prices have risen beyond their 2007 bubble peaks in Europe and the US, helping to boost apartment rentals as well. Yet, when it comes to our labor market, its a conundrum for most economists. We have near record low unemployment and record high job openings (6 Million+). So why are we seeing below normal wage growth? 

Normally we expect economic cycles to generate peak wage inflation of 3 to 4%. The historically tight labor market and surplus of job demand over hiring, one might expect record employee earnings in this expansion above 4% instead of the current 2.5%.

 Demographics and declining labor force growth rates have contributed to this slow wage inflation cycle. There was a marked deceleration in our labor pool expansion in the 1980’s and further contraction since 2007. This has reduced the inflationary pressure on resources and capacity that was common in previous decades. Without skilled immigration this trend is unlikely to improve as all Western countries will see reductions in their working age populations relative to total population from now until 2030.

Wages could still accelerate toward traditional 3 to 4% peak growth rates as long as job demand outstrips labor supply, it will just take a longer than normal expansion to find and exceed equilibrium. Labor is currently tight with U3 unemployment of 4.3%, closing in on a 48 year low of 3.9% set in 2000. Educated worker unemployment has fallen under 2.7% and has made it very challenging for companies to satisfy their demand – especially small businesses who can’t afford to outbid mega-companies.  The slimmed down labor pool is holding back some of the animal spirits that might provide accelerated investment and inflation of the GDP.

While the B Team of unskilled workers remaining are an obstacle to more rapid wage growth, competition from older workers may also be suppressing the wage data.  A Gallup polling found that 74 percent of adults now plan to work past retirement age, while 22 years earlier only 14 percent said they’d work after 65. This age group is more willing to take a 23% pay cut as the majority feel they don’t have enough savings to last through retirement, according to an Employee Benefit Research Institute and the Urban Institute. By postponing Social Security benefits until age 70, recipients boost payments by  76 percent higher than a person claiming Social Security at age 62. The Bureau of Labor Statistics has estimated that 7.2 million people over 55 will be in the labor force in 2024. That group of older workers is and will continue to be the fastest growing part of the labor force having already risen from 12% of all workers 20 years ago to 23% today.

In addition to an older, slower growing, less qualified spare labor pool, another hurdle to better employment has been obesity.   Obesity in the US is 36%, rising to 74% when including the overweight crowd. This growing waistline is a world wide bulge hitting the less educated and elderly 1st .   

Weight related ills as well as easier approvals for the leading cause of disability – “intellectual” – have sidelined many working age adults and greatly increased everyone’s healthcare costs. 

  Elevated H1B worker visas and domestic Trade school partnerships with the private sector along with health metric incentives may be needed, but the die is cast for years to come for a tight labor pool with slowly accelerating wages and productivity. Should hourly earnings inflate beyond a 3% rate it will likely signal that our Goldilocks economy is approaching an important cyclical peak.















Leave a Reply

Ready to start creating financial success? START YOUR FREE TRIAL