MNI POLICY: Fed's Daly:Wage Gain Overdone, To Slow in Recovery

U.S. wage growth will be sapped through the Covid-19 recovery because gains during the pandemic have been badly overstated by low-wage workers bearing the brunt of layoffs, San Francisco Fed President Mary Daly wrote in a research paper published Monday.

The rare move by a Fed president to co-author the paper underlines preoccupation with the idea that returning to full employment may be a more difficult task following the Covid-19 pandemic. It comes on the heels of the FOMC deciding last week to target the "shortfall" below full employment as part of its long-term goals, placing more emphasis on downside risks.

Data showing median full-time wage gains of 10% in Q2 from a year ago are "an illusion of labor market strength and cannot be used as evidence that the labor market has withstood the COVID-19 shock well," she wrote in a paper along with visiting scholar Bart Hobijn and college student Erin Crust.

About half of those unemployed or leaving the job market in the pandemic have come from the bottom 25% of wage-earners, "The Illusion of Wage Growth" showed. Long-term employees are a better guide to the true wage trend and their wage growth has slipped 2.4pp this year.

More Fringe Workers

"While the recent job losses of low-wage workers has pushed up wage growth during the onset of the Covid-19 crisis, their job gains during the recovery will instead be a drag on aggregate wage growth," Daly and her co-authors wrote. That suggests that during the recovery, wage data will likely understate progress in returning to normal.

Still, this job cycle is much different than following the 2008-09 era because more workers "are lining up on the fringe of the labor market and are not classified as unemployed."

"Evaluations of the labor market must rely on a dashboard of indicators, rather than any single measure, to paint a complete picture of the losses and the recovery," the paper said.