The Beginnings of Wage Inflation

Last year, we estimated that pointed out that there were still 7.4 million workers missing from the labor force. The presence of so many missing workers would dampen wage growth for some time to come. Today, the number of missing workers is down slightly to 6.8 million workers as of January 2020.

And, true enough, wage growth has remained rather subdued given the low official unemployment rate of 3.6% as of January 2020.

But certain sectors of the labor market are starting to tighten. For instance, the prime age (25 to 54 years old) working group is now reflecting a shortage of workers of 191 thousand people.

This indicates that wages for this age group could tighten in the not too distant future.

The tightness of the prime working age group is not shared equally among the sexes. The labor market for Prime Age Women Workers is very tight, with an estimated shortage of almost 1 million women as of January 2020.

For men, it is an altogether a different story. There are still around 800K Prime Age men missing from the labor market..

This gap for Prime Age men is being filled very slowly, only a few thousand a month. But once that gap is filled, wages should start rising up.

Related Posts: Why There Is Still No Wage Inflation: There are 8.1 Million Missing American Workers

Unemployment is Low But Wage Inflation is Low Too. Which States Have the Tightest Labor Markets?

Last month, the unemployment rate was an astounding 3.7% - a rate not seen since September 1969.

But for most of the last decade, wage inflation has been low to almost non-existent. Only recently have wages started to creep up.

One reason? Both the Civilian Labor Force Participation Rates (LFPR) and Civilian Employment to Population Ratios (EPR) have yet to reach their pre-recession peak in 2007 and their absolute peak in 2000, during the height of the dotcom bubble.

The gaps are substantial, involving millions of missing workers. For instance, if last month's LFPR were 65.70% (2007 pre-recession peak) instead of an actual 63.20%, there would be 6.5 million more workers counted in the labor force today.

If we had posted an EPR of 63.00% (2007 peak) instead of the current 60.90%, there would be 5.6 million more workers employed today.

Instead, all those workers have gone missing from the labor force. One reason why wage inflation has not been stronger is that all these missing workers are slowly starting to come back to the labor force and kept a lid on wage inflation.

But that is starting to change. Some states have reached, if not surpassed, their pre-recession LFPRs and EPRs and are starting to experience a shortage of workers.Where are those shortages? DC and Massachussets come to mind (in green). Thirteen other states (in yellow) are getting close, with less than 2% of their civilian non-institutional populations (CINP) labeled as missing. Sadly, five states (in red) have more than 5% of their workers categorized as missing from the labor force.

In terms of EPR, DC and MA have actual shortages (in green) while six other states have less than 2% of their CINPs categorized as missing (in yellow). Seven states have more than 5% of their CINPs categorized as missing.

If you add the percentage of missing workers to the state's unemployment rate, we get a closer picture of where the true unemployment rates lie. Again, DC and MA (in green) have very low true unemployment rates, while four other states (in yellow) have true unemployment rates of less than 5%. Seven states (in red) have true unemployment rates of 12% or more of their CINPs.

Why There Is Still No Wage Inflation: There are 8.1 Million Missing American Workers

Last year, we pointed out that there would be little to no wage inflation because there were still 8 million American workers missing from the labor force. That was when the unemployment rate was at 4.1% as of February 2018. Today, as of June 2019, the unemployment rate is even lower still - a decades low 3.7% and there is still no wage inflation.

Yes, wages are rising but at less than a measly $0.75 gain a year while the inflation rate has been hovering at around 2% for the past ten years.

The reason for this? Labor Force Participation Rates (LFPR) and Employment-Population Ratios (EPR) have yet to recover their Pre-Recession peak.

If the June 2019 LFPR had reached their pre-recession peak of 66.0%, the US would have roughly 8.1 million more workers in the labor force than it has now. Likewise, if the June 2019 EPR  had reached their pre-recession peak of 62.9%, the US would have roughly 6.0 million more people employed than it has now.

This means that the millions of people who disappeared from the labor force during the Great Recession are starting to reappear and get jobs and that has held wages down. The gains in LFPR and EPR have been very gradual, and at this rate, it may take years, if not decades for the economy to finally recover.


There Are Still Almost 8 Million Missing American Workers

There Are Still Almost 8 Million Missing American Workers

Last time we talked about this, there were 7.95 million missing American workers, if we used the Pre-Recession 2007 Labor Force Participation Rate (LFPR) of 65.70%.

As of August 2018, that figure hasn't changed much. There are still 7.77 million missing American workers, if we used the 2007 LFPR. The LFPR now stands at 62.70% as of August 2018, just 0.10% higher than the LFPR at the end of 2017.

Using the Pre-Recession 2007 Civilian Employment Population Ratio (EPR) of 63.00% leaves similar results: 7.04 million missing American workers. The EPR now stands at 60.30% as of August 2018, 0.70% higher than the EPR at the end of 2017.

It will take a long time for this slack to be reduced. The LFPR only bottomed out to 62.40% in 2015 and has climbed only 0.10% every year since then. Thus, it will take a staggering 31 years to cover the 3.10% gap in the LFPR.

 Therefore the US will continue to experience little to no wage inflation in the near future.

Related: Why There Will Be Little to No Wage Inflation: There are 8 Million Missing American Workers

Why There Will Be Little to No Wage Inflation: There are 8 Million Missing American Workers

On February 2, 2018, the US stock market began a series of convulsions that culminated in a 10.28% decline in the S&P 500 Index just one week later. The cause? A reported 2.9% year-on-year wage growth in January 2018, the highest since June 2009. This news sparked fears of rapid rise in inflation and interest rates. Inflation fears only subsided when it was revealed that wage growth for the lower paid 80% of the workforce, those with production and non-managerial jobs, was only 2.4%. Thus, the bulk of the wage increases mostly benefited the supervisory classes, i.e. the higher paid-workers.

One reason for the market's hissy fit? Tight labor conditions, as indicated by February 2018's 4.1% unemployment rate, the lowest it's been in almost two decades.

That 4.1% unemployment rate is deceptive because both the civilian labor force participation rate (LFPR) and the civilian employment population ratio (EPR) have gone down substantially. Both indicators are nowhere near their pre-recession peak in 2007 and are even further away from their all-time highs during the peak of the tech bubble in 2000.

Some experts have blamed the declines in LFPR as structural, i.e. due to an aging work force. However, the LFPRs for people past the prime working age (55 years and over) has largely held up since the recession.

In fact, the LFPR for those truly at the retirement age (65 years and older) has only gone up.

This indicates that there is a lot of slack in the market for labor. A lot of slack.

If the 2017 LFPR had reached their pre-recession peak of 65.7%, the US would have roughly 8 million more workers in the labor force than it has now.

If the 2017 EPR had reached their pre-recession peak of 59.40%, the US would have roughly 7.3 million more people employed than it has now.

It will take a long time for this slack to be reduced. The LFPR only bottomed out to 62.40% in 2015 and has climbed only 0.10% every year since then. Thus, it will take a staggering 31 years to cover the 3.10% gap in the LFPR. The 1.80% gap in EPRs will be covered in a much shorter time frame: only 4.5 years, because the annual gain in EPR is a more robust 0.40%.

Therefore the US is nowhere near wage inflation.

At What Point Will People Not In Labor Force Break 100 Million?

At what point will people who are not in the labor force break the important psychological barrier of 100 million?

The short answer? By June 2019, just in time for the 2020 Presidential elections.

At What Point Will People Not In Labor Force Break 100 Million?

At what point will people who are not in the labor force break the important psychological barrier of 100 million?

The short answer? By November 2018, just in time for the mid-term elections.

US Jobs Recovery is Not Running Fast Enough to Stay in Place

Today, the US Labor Department reported that the US economy added around 156,000 jobs in September 2016.  Year to date, the US economy has added around 2.03 million jobs in the nine months since 2015. In the same time, the working-age population (Civilian Non-Institutional Population in BLS parlance) has increased by 2.16 million, leaving 81 thousand out of the labor force.

This pattern has been true for much of the jobs recovery since the Great Recession began in December 2007: the jobs recovery has not been fast enough to cope with the increase in the working-age population.

United States
Employment Situation
In Thousand Persons
											2007 to September 2016
	2007	2008	2009	2010	2011	2012	2013	2014	2015	September 2016	Variance	% Variance
Civilian Non Institutional Population	231,867	233,788	235,801	237,830	239,618	243,284	246,745	249,027	251,936	254,091	22,224	9.58%
Labor Force	153,124	154,287	154,142	153,889	153,617	154,975	155,047	156,129	157,833	159,907	6,783	4.43%
Employed	146,047	145,362	139,877	139,064	139,869	142,469	144,671	147,442	149,929	151,968	5,921	4.05%
Unemployed	7,078	8,924	14,265	14,825	13,747	12,506	10,376	8,688	7,904	7,939	861	12.16%
Not in Labor Force	78,743	79,501	81,659	83,941	86,001	88,310	91,698	92,898	94,103	94,184	15,441	19.61%

Throughout the whole recovery, the US Civilian Non-Institutional Population has grown by 22.22 million or 9.58% but employment has grown by only 5.92 million or 4.05%.  This has resulted in a disproportionate increase in the people who are not counted as part of the labor force.  "Not in Labor Force" has grown by 15.44 million or 19.61%.

Not in Labor Force has become an ever increasing part of the US working-age population.

As a result, the country's employment to population ratio and labor force participation rate have yet to recover to pre-recession levels.

The labor economy shows signs of improvement.  Part-time employment and long-term unemployment are down significantly.

Moreover, Temporary Help Services are beginning to taper off.

So, the US Jobs Recovery is just muddling through.