Free Trial

MNI INTERVIEW: Wages Unlikely To Rise Much More - Fed Econ

--SF Fed's Mary Daly Sees Longer Run Wage Growth At 3% to 3.25% Per Year
--Employers Have Variety of Ways to Manage Tight Labor Market
By Jean Yung
     WASHINGTON (MNI) - U.S. wage growth is likely to remain restrained in
coming quarters and below its pre-recession peak even as the unemployment rate
plumbs new depths, Federal Reserve Bank of San Francisco's Mary Daly said in an
interview last week.
     Despite the bank's prediction that the jobless rate could hit a low of 3.6%
in the next year, nearly a full percentage point below its estimated longer run
level, there is currently little evidence that wage inflation will surge, said
Daly, director of research at the San Francisco Fed. Indeed, wage growth is
ratcheting up fairly slowly as firms find alternative ways to respond to a
shortage of qualified workers. 
     Daly's view puts more concrete form to those expressed by Fed Chair Jay
Powell and other senior Fed officials, who have reassured frustrated politicians
and the public that they expect average pay gains to continue amid a robust job
market. The FOMC has also been wary of hiking interest rates too quickly to rein
in the economy at a time when wage growth has been so tepid. 
     But the "new normal" for wage growth may be significantly lower than many
believe, Daly said. Low productivity growth suggests that wage growth over the
longer run could register between 3% and 3.25%, just a few tenths above the
current pace of 2.5% to 3%, she said. 
     "Wage growth is approaching its long run value. We're not quite there yet
but we're getting close," Daly said. 
     So even at a time when the labor market is running hotter than what's
sustainable over the long run, "we would expect to see wage growth of above 3%,
but not dramatically."
     --FIRMS LOOK ELSEWHERE
     Some expect the booming labor market to lead to pay increases that in turn
fuel broader inflation, but employers have a variety of other ways to manage a
tight market, Daly said. 
     Firms can hire less skilled workers and train them on the job, or invest in
technology that automates work. They can limit revenue growth if they can't
afford to hire workers at higher wages. What's more, if firms believe the boom
may be short-lived, they may be reluctant to offer higher pay because it would
raise their overall wage bill permanently, Daly said.
     Anecdotally, businesses in the West are reporting that they're scrambling
to find ways to satisfy millennial workers who demand more flexible schedules,
workplace amenities and parental benefits -- none of which are captured in wage
measures, Daly said. 
     "While we would think in our models that when you run a tight labor market
you would see wage pressures go up, how far it's going beyond the steady state
value depends a lot on how employers respond to that labor gap. And there's no
single way to do that," she said.
     "As a consequence, we don't see a giant pop in wages. It goes up to a peak
that's higher than sustainable, but firms make other adjustments."
     --HIGHER PARTICIPATION
     The labor force participation rate, or share of individuals working and
seeking work, provides another gauge of slack in the labor force. Although that
rate has risen slightly for workers age 25-54 in recent years, it remains below
pre-recession levels. 
     Daly sees limited scope for further participation growth. The factors
holding back participation among prime age workers are structural while
inexorable demographic trends mean rising generations can't keep up with the
numbers of baby boomers who are retiring, she said. 
     "Our view at the San Francisco Fed is that some continued cyclical recovery
in participation is likely but that isn't going to bring us back to
participation rates like we saw in the 2000s," she said. 
     "The recovery among age 25-54 workers could persist a little bit longer but
not be a long run trend."
     --FISCAL BOOST
     President Donald Trump says his business-friendly tax cuts and regulation
rollbacks are set to benefit workers, but Daly said that effect remains highly
uncertain.
     The San Francisco Fed estimates that fiscal stimulus from both tax changes
and increased federal spending could add 0.7 percentage point to growth this
year. But the resources available in the economy remain the same. 
     Whether the boost will show up in higher investment or in wage growth is
unclear, Daly said. 
     "A stronger economy in an already tight labor market will have some impact
on wage growth, but it's super difficult to tell how much because it really
depends on where the employers start to make adjustments," she said. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.