comscore This was to be the year of bigger wage gains. It’s not. | Honolulu Star-Advertiser

This was to be the year of bigger wage gains. It’s not.

Honolulu Star-Advertiser logo
Unlimited access to premium stories for as low as $12.95 /mo.
Get It Now

The unemployment rate is low by any historical standard at 5.3 percent. Businesses are complaining of worker shortages in industries including health care, construction and trucking. Household-name companies like Wal-Mart and McDonald’s have announced increases to their pay for low-wage workers.

Add those together, and it would seem to point to 2015 as being the year American workers start seeing substantially larger paychecks. The only problem: There is no real evidence in the economic data that this is happening.

Rather, a wide range of economic measures points to the same sluggish pay rises in 2015 that American workers witnessed in 2011 and every year since. The giant question hanging over the U.S. economy — for workers hoping to see a raise, employers trying to decide whether to give them one, and the Federal Reserve as it decides when and how much to raise interest rates — is whether that is poised to change soon.

Average hourly earnings for all private-sector workers were up 2.1 percent in July from a year earlier, roughly the same level at which wage growth has been for years. There has been no evidence of acceleration in pay as the year has progressed; in the last three months hourly pay rose at a 1.6 annual rate, well below its level earlier in the year. Other data points to the same conclusion. Employment compensation costs — which includes both wages and the employer’s cost of health care and other benefits — rose 2 percent in the year ended in June, in line with recent years.

Low inflation over the last year, fueled by a late-2014 drop in oil prices, means that real wage growth after accounting for inflation is more solid than it has been in recent years, but that is set to change as the impact of cheaper oil fades from inflation data.

The roughly 2 percent annual rise in wages is considerably lower than what has historically been evident when the jobless rate is in its current range (it was 5.3 percent in July; the Labor Department will release the August figure — along with the latest pay data — Friday morning). Using data dating to 1965, the unemployment rate over the last year would predict an annual wage increase for nonmanagerial workers of about 2.5 percent; it has actually been only 1.85 percent.

The explanation for the disconnect that best fits the data is also the simplest one. More so than in the past, the U.S. labor force seems to have large numbers of so-called shadow workers. These people are lurking on the sidelines of the job market but not accounted for in the unemployment rate because they are not actively looking for work.

The ratio of prime-working-age adults — 25 to 54 years old — who were employed fell during the last recession, to about 75 percent from about 80 percent. As Jared Bernstein, who studies the labor market at the Center on Budget and Policy Priorities, notes, it has rebounded only about halfway, to 77 percent.

Add in some Americans over age 55 who retired earlier than they would have preferred during the last downturn but who could be coaxed back to work, and you quickly arrive at millions of Americans able and willing to work, who have been available to fill jobs as employers have gone looking.

There has been lots of debate in recent years over whether the people who left the labor force during the recession are gone for good or will return to work amid an improving economy. The answer seems to be that they are coming back to work, just more slowly than one might hope, given that the recession ended more than six years ago.

“If we continue to get good job reports where we’re adding over a couple hundred thousand jobs a month, eventually we’ll see the pace of wage growth accelerate,” Bernstein said. “I think that connection remains a viable one. It just hasn’t happened yet because there’s a lot more slack in the job market than the topline numbers suggest.”

You could even imagine a story where the complaints of businesses that it is hard to find good workers, and the voluntary increases of entry-level wages, fit with this story of a large shadow workforce that is glacially coming back into the market.

When there is a large pool of people who fit the official definition of unemployed — people actively looking for work — finding them is relatively easy. It can be a simple matter of picking the most promising applicants and paying a competitive wage.

But when the pool of potential workers is heavily tilted toward people who are not actively seeking work, as appears to be the case today, it may be that employers have to work harder to find them. Perhaps employers are having to expend more effort to find their new workers, and paying more for the lowest-paid, entry-level staff, even as they are keeping the lid on pay increases for those at middle levels and are ultimately finding the staff they need after more difficulty than usual.

A hiring manager had an easy job between 2009 and a year or two ago, with hordes of unemployed Americans beating down the door in search of work. It’s getting harder to attract and keep good staff, and some companies may be having trouble with the adjustment, said Paul McDonald, a senior executive director at the staffing firm Robert Half International.

“If I’m an employer, I’m asking, ‘When was the last time I gave my employees, especially my high performers, a bump in compensation?’” McDonald said. “I’m asking myself, ‘What am I doing to retain my workers?’ That’s a wake-up call for some clients.”

In other words, right now companies may be having to work harder to find staff given a low unemployment rate. As more of the shadow workforce finds its way back into jobs, employers will most likely have to back their efforts with cold, hard cash, and when that happens higher wage gains should follow.

Comments have been disabled for this story...

Click here to see our full coverage of the coronavirus outbreak. Submit your coronavirus news tip.

Be the first to know
Get web push notifications from Star-Advertiser when the next breaking story happens — it's FREE! You just need a supported web browser.
Subscribe for this feature

Scroll Up