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Unemployment Will Fall, Prices Will Rise, But What About Wages?

  • Job growth has been good, but labor participation hasn't been
  • Inflation has been climbing back to normative levels
  • Consumer Product Producers haven't seen much sales growth at all
  • Wage levels haven't moved much at all

With the current economy in a "recovery" many are beginning to be hopeful with a full recovery in the labor market, the housing market, and the financial market, but as unemployment numbers have shown recently, one might want to question the solidarity of such numbers.

In a recent article by Evariste Lefeuvre, he commented on the labor participation rate and its positive relationship to wage rate growth, where higher participation rate mean higher wage growth, and with current participation levels, it doesn't look like wage rate growth isn't on the move anytime soon.

Although I do agree labor participation effects wages to a certain extent, I can't say that as labor participation declines, so does wage growth. From these two charts, we can see that wage growth has been fairly sideways, living life inside of the 1.5-2.5% range. At first, there was a deceleration in wage growth, but this is reasonable at the initial onset of an initial crisis. Since then, it hasn't been reasonable. Wage Growth has totally stalled, and is at levels that could only keep up with the growth in minimum wage laws. In the last ten years, ending 2013, there was a 10 year minimum wage growth of 40.8%, but this isn't even adjusted for inflation, so it is normal to see wage growth along the lines of an expected future wage floor along with expectation of inflation; however in such low inflationary environments, there has really barely any wage growth or higher price expectations.

(y/y % Wage growth)

Source: stateofworkingamerica.org/charts/hourly-.../

The labor participation has been on the decline since the wake of the financial crisis, signaling a smaller labor force, and an illusionary unemployment number which can lead employers, unaware of labor force size to simply assume historical relationships between unemployment and inflation; however, this time is different. Although he unemployment sitting at 6.3% looks really good and is near the natural level, it is also quite skeptical. Producers that raise prices on the notion of lower unemployment and will only depress real wages, leading to higher profit margins, cheaper labor and more revenue.

Source: BLS

With this profit increase, employers will want to produce more, therefore employing cheaper labor, and creating even more jobs, BUT, wages will continue to be depressed although in a situation like this, the labor force should become scare, and will remain scarce if wages don't rise. Unemployment numbers will continue to decline, and real wages will fall, and the labor force will stay low because who wants to re-enter when real wages are on the decline.

At the current wage levels though, real wages have increased since the end of 2008-2009, but if this labor force drop-out continues, this upward trend in real-wages will stall out.

Doesn't this sound a little like Japan (no wage growth, and raising inflation). Watch out America, we need more labor force participation.