Jobs and Wages

I am writing this on Friday, December 8, 2017.  The Department of Labor released its monthly jobs report earlier today.  There is a lot of good news on the employment/unemployment side but perplexing news on wages.

The good news:

  • Unemployment is way down to 4.1%, which is at least a 17 year low.
  • Employment is up, as the economy added 228,000 jobs in November.

The perplexing news:

  • Labor force participation rate remains low, at 60.2%.  It was 63.4% in 2007, prior to the financial crisis.  If you think about that 3.2% difference times the size of the American workforce, that’s a lot of workers who aren’t working for one reason or another.
  • Wages are up, but only by 2.5%.

The sources for my data are articles in the Wall Street Journal, linked here as follows:

Why is this news perplexing?  Because if the unemployment rate is that low and the economy is really adding that many jobs, one would think wages would go up and more people would want to work.  Supply and demand laws – if demand for workers goes up more than supply, then the price should go up.  But it’s not – at least not that much.  What gives?


There are several reasons that I believe may contribute to the low labor participation rates and depressed gain in wages:

  • Demographics:  The percentage of workers and of the general population that are older is rising.  The Baby Boomer generation is retiring in droves as they reach their 60’s and even their 70’s.  There aren’t enough younger workers to replace the Boomers.
  • Corporate mergers and downsizing:  If an older worker is a victim of layoffs through poor corporate performance or due to a merger with another company, “made redundant” in British parlance, the older worker is more likely to “take a package” from the former employer and say Sayanora to working again.  Hopefully, they had a good financial planner to guide them through what they need to maintain a decent lifestyle for the rest of their lives, which could be a long time.
  • Work is difficult:  Work is a 4-letter word for a reason.  If one has the wherewithal to avoid working, one may very well choose to do so.
  • Plateauing of personal preferences:  For a lot of people, I believe there is a desire for a basic level of lifestyle, and the money required to pay for that lifestyle.  Above that, if one has to work very had for the marginal gains in one’s lifestyle, many people decide it’s not worth the marginal work.  Especially if that person is older.  “I have all I need to live well.  Why should I bust my butt for something I don’t really need at this point in my life?”
  • International labor competition:  Like it or not, we are in a global economy.  If you like to shop at Wal-Mart, where do you think all of that stuff comes from?  Most likely other countries.  Not the USA.  Except maybe for the food.  Those other countries do not pay their workers like we do here.  That’s who American companies and American workers have to compete with.  The global economy keeps US wages low and it will continue to do so.
  • Disincentives for smaller businesses:  Licensing and regulation hinder new businesses from forming and from growing.  Continuing compliance with these regulations is expensive for businesses.  For instance, in the financial services and banking industry, many smaller banks have opted to merge rather than to continue to pay for compliance with greater regulations.  Fewer smaller banks mean fewer options for small businesses to grow.  All of this keeps wages low.
  • Housing underperformance:  Housing and other construction is one area where employment typically grows during a period of economic growth.  Yet, since the housing crisis of 2007-2008, growth has been there, but proportionally much less than in previous recoveries.  Housing prices are strong and resale housing inventory is very low, but new housing construction is not robust enough to fill the gap.  Much new housing construction caters to the upper-middle and upper end of the market.  There are not nearly enough new housing being built for entry-level and working-class buyers in areas where there has been job growth.  Costs and fees are so high that lower-end new housing doesn’t pencil for builders or investors.  Consequently, employment in construction is not as high as it should be and wages therein are kept lower than they should be given 4.1% unemployment.

There are probably other causes for this low unemployment/low wage growth situation that we currently have.  We need to figure out how to increase wages.  I believe in reducing the costs and the regulations that are hindrances to economic growth.  Others believe in raising the minimum wage and increasing oversight of how workers get paid.  I always believe that less government is the answer, but there are and will be cities and states that will address the problem differently.