MNI INTERVIEW: Room for Improvement in Jobs Report-Fed Econ

--Wage Growth Leveled Off, Atlanta Fed Economist Tells MNI 

--People Entering or Staying in Labor Force Has Dampened Wage Pressures

--Graying of Workforce Had Small Effect on Wage Patterns

By Jean Yung

     WASHINGTON (MNI) - Despite a low and falling U.S. unemployment rate, soft

wage growth continues to signal that the labor market has room to improve, a

Federal Reserve Bank of Atlanta economist told MNI in an exclusive interview. 

     Year-on-year growth in the average wage level of continuously employed

people as measured by the Atlanta Fed's Wage Growth Tracker fell to 3.2% in 2017

from 3.5% in 2016, even as the official unemployment rate declined half a

percentage point to 4.4% and entered the vicinity of full employment. 

     In February, the wage growth measure sank to 2.9%, down a full percentage

point from its post-recession high in late 2016, while the jobless rate fell

even further to 4.1%. Average wage growth in past periods of full employment has

been roughly 4%. 

     "My expectation last fall was we would see the Wage Growth Tracker move

higher as the unemployment rate moves lower, but it turned out that wasn't the

case. At best it was moving sideways," Atlanta Fed economist John Robertson

said. "That I took as potentially an indication that the labor market is not

super tight." 

     The data would support the argument from Fed Chair Jay Powell and others

that inflation risks are still contained and the Fed can afford to be patient in

tightening policy. Investors fear that accelerating wage growth could prompt

officials to raise interest rates quicker than they would otherwise.

     --GROWING WORKFORCE

     A huge gain in the number of people working or seeking work in recent

months, bucking longer run demographic trends, has likely held down wage growth,

Robertson said. The Bureau of Labor Statistics' participation rate rose 0.3

percentage point last month to 63.0%. The proportion of people in their prime

working years (age 25 to 54) who are in the workforce is at its highest level in

seven years.

     "We're getting movement along the labor force participation margin and that

could be dampening wage pressure," Robertson said. "It looks like a very delayed

cyclical response to the increasing strength of the labor market." 

     Expansive federal fiscal policy, including tax cuts and boosts to capital

spending, could theoretically have a positive supply effect on labor as well.

The nonpartisan Congressional Budget Office estimates that the participation

rate for prime age workers could rise a bit more before leveling off at a rate

below that of prerecession levels. 

     "That seems reasonable to me, but how much it would come back before

leveling off I don't know," Robertson said. "I don't expect prime age labor

force participation to continue to rise indefinitely. But it could be something

that we see for another six months or a year or more." 

     --GRAYING WORKFORCE

     As the Wage Growth Tracker focuses on the pay raises experienced by

continuously employed workers, it is not representative of all those who are

employed and it does not control for shifting demographics over time. 

     That prompted Robertson and bank economist Ellyn Terry to look at two

potentially important factors that could affect the wage trend: the graying of

the workforce and the tracker's exclusion of younger earners who tend to dart in

and out of employment. 

     Workers tend to experience lower wage growth as they approach retirement

age, and the fraction of employees 55 and older has risen markedly in recent

years. In 2017, they represented 23% of the labor force, nearly double the share

two decades ago. 

     However, holding the demographic and job characteristics of the workforce

fixed to what they looked like in 1997, Robertson and Terry found no change in

the trend of wage growth flattening out in recent months -- it just plateaus "at

a slightly higher level," they said. 

     Separately, workers age 24 and under, who are much less likely to be

employed continuously because they are more likely to go to school or be

unemployed for a while, are underrepresented in the Wage Growth Tracker sample.

Adding them back into the model gives a more cyclical result that shows stronger

wage growth at peak times, Robertson said. 

     "Young people have more dynamic wage growth. So you see the Wage Growth

Tracker is more cyclical too. But again, at the end of the day it doesn't change

the story about wage growth over the last year," he said.

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

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