A Look at our Current Labor Market: The Good and the Could Be Better
For the first time since 2000, there are more job openings than unemployed persons to fill them. Job openings rose to 6.7 million positions in April, more than the 6.3 million that were unemployed in April. A shrinking workforce is becoming a significant factor, in part as baby boomers retire and students decide to stay in school longer before joining the workforce.
The tighter labor market is also leading to a growing “Quits Rate”, which essentially measures how many workers quit their jobs voluntarily as opposed to being fired or laid off. Each month the U.S. Department of Labor releases employment data that includes how many workers are actually quitting their jobs. The data is considered a critical barometer of the labor market’s health and an indicator of economic growth. Many economists and analysts follow the Quits Rate closely because it reveals the level of worker confidence. These same workers are also the consumers that the Fed monitors to determine if their confidence is allowing them to spend more, thus lifting economic growth. The most current Quits Rate rose to 2.4 in May, the highest monthly reading in over 10 years.
Following the financial crisis in 2008, threats of lay offs and firings lingered and the Quits Rate dropped as workers clung to their existing jobs rather than seeking new opportunities. Since then, however, the general trend has gained upward momentum. Historically, a higher Quit Rate has coincided with rising compensation as employers tend to raise salaries and wages in order to retain qualified employees. Increased earnings bode extremely well for worker and consumer confidence, key ingredients for improving economic conditions.
However, in spite of this promising news, wages are not rising. The Federal Reserve Bank of San Francisco recently released statistics that show an abnormally high share of employees in the same job capacity for the past 12 months did not receive a pay raise. This unusual dynamic is referred by economists as “wage rigidity”. Fed data reveals that over 14% of American workers are not getting pay raises, even though the unemployment rate reached 3.8%, an 18-year low.
The Bureau of Labor Statistics reported that U.S. wages increased by 2.7% between July 2017 and July 2018. Historically, when unemployment is at such low levels as it currently is, wages have actually risen 3.5% to 4.5% per year because employers are competing over a limited workforce.
One theory as to the cause of this seemingly backwards phenomenon is everyone’s favorite scapegoat, Millenials! As younger workers enter the workforce, they hold down labor costs, as they replace more costly, older workers. The challenge for companies has been finding younger qualified employees to replace older retiring employees, which of course is not always a realistic expectation.
Are wages at least keeping up with inflation? In theory, they are closely linked – as one rises, the other follows. Yet, inflation has risen 2.9% from July 2017 to July 2018, ahead of wages, which have only grown by 2.7% during the same period. In fact, slow and steady inflation has eroded buying power over the past decade. Since 2009, inflation has eroded 10% of buying power. So this year, someone will have to work over 40 additional days to make the equivalent of the 2009 minimum wage.
If wages do not begin to rise, the unemployment decline becomes, in part, an empty data point. Having a job will not exempt everyone from struggling financially. One-third of all workers earn less than $12 an hour and 42% earn less than $15. That’s $24,960 and $31,200 a year. It is difficult to imagine raising a family on such incomes, when accounting for food, rent, childcare, car payments, and medical costs.
For all the public policy proposals to improving income and wages, the private sector is key to getting the nation on a better track by raising wages, increasing benefits and investing in new ventures and expanding markets.