WASHINGTON, United States (AP) — This isn’t explained in Econ 101.
Month after month, US hiring keeps rising, and unemployment keeps falling. Eventually, pay and inflation are supposed to start surging in response.
They’re not happening.
Last month, employers added a healthy 252,000 jobs, ending the best year of hiring since 1999 and the unemployment rate sank to 5.6 per cent from 5.8 per cent. Yet inflation isn’t managing to reach even the Federal Reserve’s two per cent target rate.
And paycheques are barely budging. In December, average hourly pay actually fell.
Economists are struggling to explain the phenomenon.
“I can’t find a plausible empirical or theoretical explanation for why hourly wages would drop when for nine months we’ve been adding jobs at a robust pace,” said Patrick O’Keefe, chief economist at consulting firm CohnReznick.
Normally, with unemployment this low, the Fed would raise its benchmark interest rate to prevent inflation from spiking and the economy from overheating. Not this time. Though the Fed’s record-low rates have helped support the economy since the 2008 financial crisis, those low rates haven’t met their other goal of raising wages and inflation to normal levels.
As long as inflation stays consistently below its target, the Fed might feel pressure to delay a rate increase beyond midyear, when most economists have predicted a hike. Thanks in part to plunging oil prices, many economists now envision even less inflation this year than in 2014.
When the US economy last enjoyed a similar hiring binge, in 1999, average wages climbed 3.6 per cent, compared with 1.6 per cent last year, according to the government.
So what explains consistently solid job growth without inflation? Here are four crucial factors:
RECESSION’S LINGERING DAMAGE
Though the unemployment rate is back to a nearly healthy level, many other measures of the job market remain subpar.
There are still 6.8 million people working part-time who can’t find full-time jobs, up from 4.1 million before the recession. Each of those workers potentially competes with the unemployed for full-time work, thereby holding down wages.
And there are 2.3 million people who have recently stopped looking for work, some of them because they grew discouraged about their prospects. Others chose to return to school or to care for relatives. That’s up from 1.3 million before the recession.
BLAME THE ROBOTS
What’s happened in the auto industry reveals much about how the economy has been transformed and why a nearly normal 5.6 per cent unemployment isn’t igniting wages.
Sales of new cars last year reached 16.5 million, the best performance since 2006. But the gains have yet to restore every auto job lost to the recession let alone expand the industry’s employment over the past eight years. The number of autoworkers remains about 160,000 shy of pre-recession levels of more than one million.
The reason: Companies fear returning to the days when they had too much factory capacity. So they’re squeezing more production out of less capacity. Emerging from the recession, automakers reconfigured factory floors and added robots to produce more vehicles from fewer plants and fewer workers.
What’s more, the United Auto Workers union agreed to wage cuts in an effort to help General Motors, Ford and Chrysler. New hires started at around US$16 an hour, about half of what long-time workers earn.
Roughly a quarter of Detroit’s factory workers now make the entry-level wage.
CHECK THE DEMOGRAPHICS
Since the start of graduation season in May, employers have hired an additional 1.67 million college graduates — nearly 60 per cent of all jobs added last year. In the past year, the number of 25-to-34 year-olds with jobs has climbed a solid 2.5 per cent.
Dig a bit deeper and you find other age-based pressures: The number of workers older than 55 climbed an impressive 3.4 per cent last year. But those employees likely maxed out their salary potential years ago and are unlikely to enjoy sharp pay hikes. The number of employed 35-to-54-year-olds — the age group most likely to be in their peak earnings period — rose less than one percentage point in the past year.
GLOBAL REALITY BITES
No matter how much the US economy improves, American workers still face competition from billions of workers in China, India, Eastern Europe and elsewhere who weren’t part of the global economy a decade or two ago.
That most of those economies, as well as Japan and the rest of Europe, are stumbling only intensifies the competition for jobs. Weak growth overseas has lowered interest rates and inflation — and therefore tempered pay growth — in many of the United States’ competitors. That means US workers face continued low-wage competition.
At the same time, the dollar’s value is rising against other currencies, thereby making US goods costlier overseas. This limits the ability of U.S. workers to secure higher pay. Many US companies can move operations overseas.
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Why US inflation stays ultra-low while job growth is surging
