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

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

Where is the US Labor Market Slack and Where is it Tight?

In our last post, we explained why there has been surprisingly little wage inflation in the USA despite the persistence of a historically low unemployment rate. The simple reason for low wage inflation. There are around 8 million missing workers who dropped off the labor force.

In this post, we are trying to map out where those missing workers are by state using the pre-recession peaks in the Labor Force Participation Rate (LFPR) and the Employment to Population Ratio (EPR).

In terms of absolute numbers, California, Florida, and Texas have the highest number of missing workers. The states with lowest number of missing workers are District of Columbia, Massachussets, North Dakota, and Vermont.

In relative terms, the results are very different. At 6.75%, New Mexico has the highest percentage of missing worker relative to its Civilian Noninstitutional Population (CNIP). Neighboring New Mexico has the next highest percentage, 6.46%, closely followed by Wyoming at 6.26%.

The tightest labor markets are the District of Columbia with a shortage of 1.82% of its CNIP. Massachussets also suffers from a shortage of workers: 0.61% of CNIP. Wisconsin is next with an excess number of workers that amounts to 1.03% of its CNIP.

A similar dynamic plays out using the pre-recession Employment to Population Ratio.

Once again, California, Florida, and Texas have the highest absolute numbers of missing workers. On the flip side, both Massachussets and the District of Columbia have a shortage of workers. North Dakota and Vermont have a miniscule amount of missing workers.

Relative to their CNIPs, Nevada (6.33%), New Mexico (5.62%), and Wyoming (5.50%) have the highest percentages of missing workers. The District of Columbia has an acute shortage of workers (-2.28%). Massachussets is just about balanced, and Maryland's missing workers amount to 1.10% of its CNIP.

 Related Post: 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.