Connecting the Dots

×

Connecting the Dots, Patrick Watson’s online newsletter, now lives exclusively on the Mauldin Economics website.

Please bookmark this page so you can always find his latest take on the geopolitical, cultural, and technological forces decentralizing and disrupting the global economy.

Wage Growth Surging? Not Really

September 18, 2018

The US economy is at “full employment,” says the official 3.9% unemployment rate. Every educated person who wants to work has at least one job. Some of us have several.

But hearing economists talk, the bigger problem is that fully employed people haven’t seen  enough wage growth. It’s a puzzle. Wages used to rise faster when unemployment was this low.

Hence, there was much celebration when the August jobs report showed a 2.8% annual increase in average hourly earnings for “Production and Nonsupervisory Employees,” i.e., regular workers. Numerous news articles reported it was the fastest wage growth since 2009.

That was correct in a narrow, technical sense. But not in real life.


Photo: Getty Images

Real Wages Are Flat

Aside from the monthly employment report, the Bureau of Labor Statistics also compiles the Consumer Price Index, our primary inflation gauge.

For the 12 months ending August 2018—the same period in which average hourly earnings rose 2.8%—the CPI for All Urban Consumers (CPI-U) rose 2.7%. That’s how much the cost of living went up, on average.

(Your mileage may vary, of course, depending how you spent your money. But unless you had no housing or transportation expenses in the last year, your cost of living probably rose at least  2.7%, and possibly much more.)

That being the case, a 2.8% wage gain is essentially no gain at all. Inflation-adjusted wages are flat since last year. It is certainly not the fastest wage growth since 2009, or even close.

But that’s not what you read in the news. They showed you charts like this one, which doesn’t adjust for inflation (larger version here).


Source: Bureau of Labor Statistics, St. Louis Federal Reserve Bank

This happy picture shows annual wage growth started a nice rally in mid-2017 and apparently is set to go higher still. But again, that doesn’t consider inflation.

Here is the very same data series for the same time period, but subtracting CPI-U inflation (larger version here).


Source: Bureau of Labor Statistics, St. Louis Federal Reserve Bank

Quite a different picture. We see that real wage growth peaked in 2015 and is, except for a brief pop in early 2017, still trending down. It’s been approximately zero in recent months.

The best you can say here is, “It could be worse.” At least real wages aren’t dropping hard, as they did in the recession years. That’s nice, but it hardly justifies all the positive spin.

Economists and journalists know about inflation. They routinely report Gross Domestic Product growth in real terms, for instance. But not wage growth. For that, they assume inflation doesn’t matter.

But it matters a lot. Workers whose earnings don’t keep up with inflation find themselves falling behind. Eventually, they notice the problem and look for someone to blame. Hence, our current social and political discord.

     
-
John Mauldin

Are you ready for the next recession? Trade war? Liquidity crisis?

Read Over My Shoulder and find out.
Special 33% savings available through October 1 only.

Learn more here »

-
     

Memories of 1980

One more chart. This is average hourly earnings minus CPI-U, same as the sad-face chart above, but this time going back to 1965 (larger version here).


Source: Bureau of Labor Statistics, St. Louis Federal Reserve Bank

Again, this shows the inflation-adjusted percentage change in average hourly earnings for the last 12 months. When the blue line is below zero—as it was for long periods—real wages were actually dropping instead of growing. 

On the positive side, there were a couple of times when real annual wage growth approached 5%... but only a couple, and they didn’t last long.

Notice that big spike down in 1980, by the way.

I was in high school at the time. On Election Day that year, I remember seeing people lined up for hours to sweep out Jimmy Carter. Other things were happening too, but voters blamed him for the sharp wage drop you see in this chart. Not to mention the 7.5% unemployment rate that November.

Thankfully, we are nowhere near that point now. But neither are we in the best of times.

Real wages are flat and trending the wrong way. Yet we are told by politicians from the president on down—and by experts who should know better—that workers should celebrate their good fortune.

What’s really happened is a redefinition of “good fortune.” Simply having a steady paycheck now means you should count yourself lucky.


Photo: Getty Images

Labor Isn’t Scarce

Economic theory says labor scarcity should force employers to raise wages. That’s indeed happening in certain segments. But it misses a crucial point.

Labor isn’t scarce in the growing number of occupations that can be automated. Supply is abundant if you include the machines.

I think this helps explain the wage puzzle. Low-wage workers don’t ask for more because they are (correctly) afraid of being replaced, and employers have little incentive to raise wages for those workers.

This probably won’t end well. As automation technology improves, millions of people will get steadily poorer and unhappier, and millions more will join them.

(I say “them” instead of “us” in hopes I won’t be in there too. But none of us should assume we’re safe.)

If we’re lucky, the mass un- and underemployed will peacefully line up to force changes like those I watched in 1980.

I doubt we’ll be that lucky.

See you at the top,

Patrick Watson
@PatrickW

Discuss This

We welcome your comments. Please comply with our Community Rules.

Comments

There are no comments at this time.


Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Thoughts from the Frontline, The Weekly Profit, The 10th Man, Connecting the Dots, Transformational Technology Digest, Over My Shoulder, Yield Shark, Transformational Technology Alert, Rational Bear, Street Freak, ETF 20/20, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2018 Mauldin Economics