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Repeats Story Initially Transmitted At 12:15 GMT Nov 10/08:15 EST Nov 10
--Trend Growth for Wages Lower Today Vs Pre-Crisis, SF Fed's Mary Daly Tells MNI
--Shifting Workforce Composition, Slow Productivity Growth, Low Inflation
By Jean Yung
WASHINGTON (MNI) - Wage growth has picked up and already exceeded its new
normal trend rate as the unemployment rate has fallen, offering further evidence
there is limited slack in the labor force, Mary Daly, a labor economist and the
director of economic research at the Federal Reserve Bank of San Francisco, told
MNI in an exclusive interview.
The jobless rate is half a percentage point below its estimated natural
rate but wage growth has been muted at around 2.5% per year, compared to the
roughly 3.5% seen the last time unemployment was this low. Does that mean the
signal has been muddled or is there more slack out there than policymakers
Daly's research found the former explanation more likely. Taking into
account the changing composition of the American workforce, low productivity
gains and below-target inflation, "I would say we're seeing a pick-up in wage
growth above its trend level, because we've already hit the rate we had before
the crisis," Daly said.
"Wage growth of 2.5% wouldn't surprise me for a while. Getting up past 3% I
think would challenging in the long haul," she said, referring to a measure of
median weekly earnings constructed in-house at the Fed bank that is closely
related to the median weekly earnings series reported quarterly by the Bureau of
Under Chair Janet Yellen's leadership, the Fed waited to raise interest
rates to bolster the economy. That appeared to pay off: Individuals who weren't
working or looking for a job have been coming off the sidelines to rejoin the
labor market. The labor force participation rate, which fell four-tenths to
62.7% in October but has been relatively steady over the past two years,
continues to buck its estimated long-term trend, Daly noted.
"Labor force participation has been relatively flat when we would expect it
to be coming down, so that means we have cyclical reentry of workers," she said.
"It's a good thing for the labor market. It signals strength. But that's a
reason we might not be able to trust the aggregate wage growth measure as a
strict indicator of full employment."
Her team pinpointed several compositional shifts in the labor force as key
reasons why aggregate measures of wage growth have been so disappointing.
The retirement of high-wage baby boomers, reentry of long-term unemployed
and the entry of younger workers -- two groups that tend to earn lower wages --
are shaving about a percentage point off median weekly earnings growth right
now, Daly said.
She judges that slightly more than half of the compositional shift is
transitory while the remaining is persistent, shaving half a percentage point
off trend growth in wages over the long haul.
"My best forecast is over the next year -- by the end of 2018 or before --
the effects of the increase in labor force participation is going to diminish,"
she said. "But the baby boomers will continue to retire, and the net replacement
will be a net reduction in wage growth," likely for another decade.
By looking only at the wage growth of continuously full-time employed
workers, which isolates the compositional effects, Daly found that that rate is
already back where it was before the financial crisis.
"We've made a full cyclical recovery in full-time worker wage growth, which
is in my mind a very good measure of how strong the labor market is," she said.
But in the long run, the potential for nominal wage growth requires a rise
in productivity and in inflation, she cautioned. The San Francisco Fed projects
trend economic growth at just 1.5% per year, one of the most pessimistic
outlooks among the Fed banks.
"With productivity growth lower than 1% and inflation lower than 2%, it's
going to put downward pressure on the aggregate wage growth number," Daly said.
Data out of BLS last week showed nonfarm labor productivity jumped 3.0%,
rising at its fastest pace in three years, in the third quarter. But Daly said
even if trend productivity picks up for good, which history illustrates is
difficult for economists to forecast, employers are very slow to respond with
raises because raises cannot be easily rolled back.
"You wouldn't just have a couple months of good data. You'd have to see it
move up and stay up and you'd have to see commentary saying this is the new
normal," before it translates to wage growth.
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org