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

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