MNI ANALYSIS: Lack Of Skilled Laborers Limit US Wage Inflation

By Holly Stokes

     WASHINGTON (MNI) - Despite the unemployment rate dipping to a new

17-year-low in April, moderate wage inflation has left questions of how much

slack is left in the labor market, as only select industries have seen strong

wage inflation and few workers appear to possess desired skills.

     While some argue that the headline unemployment rate U-3 measure, at 3.9%,

is hiding a deceptive amount of slack that is keeping wage inflation moderate, a

look at the more inclusive U-6 measure shows that there is still a historically

low percentage of the labor force unemployed. 

     The U-6 rate, which accounts for those employed part-time for economic

reasons and only marginally attached to the labor force, is admittedly higher at

7.8%, but is also at its lowest level since 2001 and has moved closer to the U-3

in recent years, suggesting there is less slack "hidden" by the use of U-3 than

some see. 

     Further, in this economic cycle, the U-6 rate has fallen at a faster rate

than in its series history, and at a much more pronounced rate than the U-3. As

this measure falls, it becomes clear that not only is employment increasing, but

there are less people unable to find just part time positions or feeling

discouraged. With both U-3 and U-6 declining, questions remain as to why wage

inflation is slower to rise.

--HISTORICALLY SOFT WAGE INFLATION

     Wage inflation, while healthy, suggests that the labor market may not be as

tight as the unemployment rate suggests. An unemployment rate at 3.9%

historically has coincided with a much greater year/year increase in wages than

is currently the case.

     Looking at the average hourly earnings for production and nonsupervisory

employees, the longer tracked measure of wage inflation, it can be seen that

when the U-3 rate is at 3.9%, there is an average year/year wage growth of 4.4%.

The much lower current rate of 2.7% year/year suggests that for some reason,

current laborers cannot bargain for as high of wages as was previously the case

in equally tight labor markets.

     In part, this relative softness in wage inflation fits into the broader

slowing trend in wage gains in the past two decades relative to the rapid growth

seen in the 70s. However, even looking at only the last ten years, wage growth

has been unable to match levels seen at higher unemployment rates.

Accordingly, several participants at the FOMC meeting on May 1 and 2 noted that

recent wage development provided little evidence of an overheating labor market.

And, several participants noted that just a few industries and occupations faced

extreme labor tightness, with these select industries being the only recipients

of strong wage inflation.

--INDUSTRY SPECIFIC LABOR TIGHTENING

     Industry and government data suggest that labor market tightening is being

driven by transportation and construction industries. The April ISM

non-manufacturing report highlighted the continued labor shortages in

construction, as respondents reported the short supply is constraining capacity.

Consequently, backlog orders increased in construction, as the sector failed to

keep pace with growing demand. ISM manufacturing and non-manufacturing reports

also pointed to numerous complaints among respondents of a shortage in

transportation labor, specifically class-A drivers.

     The Fed's Beige Book, released April 18, confirmed these industries are

tightening, noting that construction and transportation were two of the most

commonly cited labor shortages reported to districts.

     As expected, the tightening labor markets in these two sectors has

translated into a stronger weekly wage gain than the total private weekly wage

gain - as both hours worked and hourly wages rose on a year/year basis. The

April Employment situation report showed that average weekly earnings for total

private workers has grown 2.9% year/year, while construction earnings have

jumped 4.1% and transportation & warehousing wages increased 3.2%.

--COMBATTING INDUSTRY SHORTAGES

     Labor shortages in sought after skills have left positions unfilled, with

the April NFIB Small Business Optimism reporting that 88% of business owners

trying to fill a position found few or no qualified applicants. As higher

salaried positions are not occupied, wage inflation does not fully recognize

increased demand. 

     Additionally, 12% of businesses in the NFIB survey reported turning to

temporary workers to cover unfilled positions. This results in an increase in

employment, but not in people getting industry raises given to regular

employees. Also holding down wage inflation, the Beige Book highlights the

recent uptick in training provided to previously unqualified workers to fill

positions, resulting in lower salaries for the unaccounted-for cost of

investment.

     In an effort to understand how much slack is left in an economy with a

shrinking unemployment rate but overall moderate wage inflation, it becomes

apparent that the issue may in fact be a mismatch of skills. While more

Americans are finding jobs, fewer are finding themselves well positioned enough

to barter for large salary increases, especially as employers face rising

business costs. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com