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--Wage Growth Indicator Still 50bp Short of Full-Employment, Economist Tells MNI
--People Entering Labor Force Has Kept Unemployment Rate, Wage Growth Steady
By Jean Yung
     WASHINGTON (MNI) - As policymakers watch closely for signs that low
unemployment will generate above-trend inflation, a Federal Reserve Bank of
Atlanta economist told MNI in an exclusive interview that wage growth has not
accelerated to a pace consistent with an economy at full employment, indicating
there's still some slack left in the labor market.
     Year-on-year growth in the average wage level as measured by the Atlanta
Fed's Wage Growth Tracker picked up quite a bit over the past 12 months, hitting
a seven-year high of 3.9% late last year and nearing the pace seen before the
last recession. But it has since failed to sustain that momentum, retreating to
as low as 3.2% and landing at 3.4% in August.
     "When we were pretty much at full employment, wage growth was around 4%. So
we are about 50 basis points shy of that benchmark," Atlanta Fed economist John
Robertson said. "My interpretation of the fact that it's not continuing to rise
is that that's consistent with there still being some slack in the labor
market."
     A tight labor market is expected to lead to pay increases that in turn fuel
consumer demand and price rises, but wage growth has remained subdued.
Economists surveyed by MNI expect the unemployment rate to hold steady at the
decade low of 4.4% in September, while average hourly earnings are forecast to
rise just a tenth to 2.6% from a year ago.
     The Atlanta Fed's indicator, one of several wage growth gauges favored by
Fed Chair Janet Yellen, focuses on the pay raises experienced by continuously
employed workers. It neutralizes the impact of entry and exit of employment on
wage costs, and it weighs the wage growth of low and high wage workers equally.
     So while the Wage Growth Tracker finds wages rising at a higher rate than
average hourly earnings tracked by the Labor Department, it's not a direct gauge
of growth in wage costs per worker.
     "It's important not to think of the Wage Growth Tracker as a direct measure
of growth in labor costs, which is a key input into pricing decisions by firms,"
Robertson said. "It's another way to look at slack in the labor market."
     The Wage Growth Tracker is closely correlated with the unemployment rate,
which sank as low as 4.3% earlier this year. But a surge in the number of prime
working age men and women joining the labor force has prevented the unemployment
rate from falling further. The participation rate for workers between the ages
of 25 and 54 sits at 81.6% in August, above the 30-year low of 80.1% seen in
September 2015.
     "People are coming in from the sidelines and entering the labor market more
now than in the past, and are more likely to stay once they have entered,"
Robertson said.
     "If the labor force participation rate wasn't rising for prime age people,
then the unemployment rate would probably come down much further and we might
see more wage pressure from that channel," he said.
     However, Robertson reckoned it is not immediately apparent how much further
this trend has to run.
     The recent rise in labor force participation "is being driven primarily by
females, which may be related to the demand for the types of jobs females are
more likely to work in." But because the factors driving individuals back to the
labor market is unclear, "it's hard to figure out how much higher labor force
participation can go."
     One bright spot in the data has been the improving prospects for people
working part time. They fared poorly in the recession, seeing wage growth as low
as 0.1% in December 2011, but in the past few years part-time wage growth has
returned to a pace consistent with historical patterns.
     As well, people who have changed employers within the last three months are
now experiencing about 1 percentage point higher wage growth than those who
stayed at their jobs. The opposite was true during the recession, Robertson
said, as people were forced to switch jobs. Yet, during the IT boom in the late
1990s, that gap on average was probably between 100 and 150 basis points.
     "The Wage Tracker is telling us the labor market is not overheating,"
Robertson said. "Having said that, we also hear from firms that they have a lot
of trouble hiring, particularly in specific occupations and for more skilled
people."  
     And that is why Fed officials argue it is only a matter of time before
tight labor markets lead to wage and price pressures.
     It "would be imprudent to keep monetary policy on hold until inflation is
back to 2%. Without further modest increases in the federal funds rate over
time, there is a risk that the labor market could eventually become overheated,
potentially creating an inflationary problem down the road that might be
difficult to overcome without triggering a recession," Yellen said last week. 
     "Some observers have pointed to the continued subdued pace of wage growth
as evidence that the economy is not yet back to full employment," she said. "But
growth in average hourly earnings and the Atlanta Fed's Wage Growth Tracker have
clearly picked up." 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
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