Weak Wage Growth Tied to Weak Productivity

By Economic Indicators FOXBusiness

The basic laws of supply and demand haven’t applied to American employers.

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A healthy number of new jobs created each month combined with a rapidly falling headline unemployment rate would seemingly suggest a tightening labor market that in turn would force American employers to pay higher wages.

But that hasn’t happened.

Instead, stubbornly low wages have kept downward pressure on consumer prices, holding inflation well below the Federal Reserve’s 2% target. Weak wage growth has been a primary reason the Fed has been so reluctant to raise interest rates, and wages will be front and center on Friday with the release of the October jobs report.

“The continued sluggish readings in employee compensation are surprising and a bit of a puzzle given the many labor market indicators pointing to a tighter labor market. The absence of an acceleration in wage growth will be discussed and debated among (Fed) members in the context of whether they should start rate lift-off in December,” analysts at Oxford Economics wrote in a research note last week.

The reason for the disconnect may be that, in this case at least, the basic laws of supply and demand don’t apply any more.

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Consequently, assurances from influential economists – namely those at the Fed who are setting U.S. monetary policy – that wages will rise as the labor market continues to strengthen may be over-simplifying the predicament facing U.S. workers.

Quality is the Answer

Rather, the vexing problem of stagnant wages amid a tightening labor market will likely require a set of far more complex solutions than simply adding more jobs. Broadly speaking, the answer will lie not in the number of jobs but in the quality of the jobs that are created and the quality of the workers America produces to perform those jobs.

To be sure, there are cyclical problems still working their way through the global financial system in the wake of the 2008 financial crisis and the crippling recession that followed. Central banks outside the U.S. such as in Europe are battling legitimate concerns of deflation, a grinding economic cycle in which weak demand for goods holds down prices and wages.

These overseas central banks are fighting deflation by devaluing their currencies, which makes their exports more affordable. At the same time devalued international currencies make American imports more expensive and, more importantly perhaps, cause the U.S. dollar to surge against those other global currencies.

“All of this is making it difficult for the U.S. economy to do what it normally does after a recession, which is surge. Weakened global economies are dragging each other down,” said Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), a public policy and economics research organization in Arlington, Virginia.

Meanwhile, a handful of structural shifts to American society have had a dramatic impact on the workforce, shifts that won’t be reversed without a comprehensive approach toward raising the quality of the U.S. workforce by both monetary and fiscal policy makers. Which is to say central bankers who set monetary policy and lawmakers who set fiscal policy.

Some societal shifts aren’t likely to reverse themselves anytime soon. For instance, the decades-long decline in influence of labor unions, especially in the private sector, has taken away the ability of workers to band together to bargain for higher wages. That’s kept wages low in a number of industries such as manufacturing that were once union strongholds.

A Serious Issue

Other societal shifts can and need to be addressed, but it won’t be easy.

“The most important thing over the last three years is that productivity has been very weak,” said Waldman. “Labor productivity has fallen off and labor gets paid what labor produces.”

Labor productivity – or the total output per hour of all workers – has fallen for a couple of reasons, according to Waldman. First, and perhaps most significantly, America has a shortage of workers qualified for the high-tech jobs that have emerged as companies have moved lower-paying low-tech jobs overseas in search of cheaper labor.

“We don’t have the quality of labor that we need,” said Waldman. “The U.S. isn’t producing workers who are qualified to work in the rapidly changing technological world in which we live.”

Another problem is weak capital spending by companies that have been reluctant to spend money investing in capital improvements if their investment isn’t likely to turn a profit.

“We don’t have the quality of labor that we need and we don’t have the capital investment,” Waldman added. “In some sense it’s no mystery then why labor productivity has slowed in recent years and if it continues to decline it will become a serious issue.”

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