LOW WAGES WORK AGAINST A FED MOVE / THE WALL STREET JOURNAL

Heard on the Street

Low Wages Work Against a Fed Move

December Jobs Data Show Drop in Unemployment, Payroll Gains

By Justin Lahart

Jan. 9, 2015 3:02 p.m. ET


Even as unemployment keeps falling, wages just aren’t picking up. With nobody confidently able to explain why, the Federal Reserve should have the confidence to take it slow on raising rates.

The U.S. added 252,000 jobs in December, the Labor Department reported Friday, with revisions to the previous two months raising the country’s total payrolls count by another 50,000. The unemployment rate fell to 5.6% from 5.8% in November, and 6.7% a year earlier.

Yet average hourly earnings fell by 0.2% from November, and November’s gain was revised to 0.2% from 0.4%. That put hourly earnings just 1.7% above where they were a year earlier, one of the weakest readings on record.

When unemployment falls, employers, facing stiffer competition for workers, are supposed to pay higher wages. That is something that held in the past but isn’t now, and it is unclear why.

One explanation is that wage growth is low because there is more slack in the labor market than the unemployment rate shows. But this view no longer really cuts it. The labor force participation rate, or the share of the working-age population that’s either employed or looking for employment, hasn’t risen even as hiring has picked up. And with the employed as a share of the population rising to 59.2% from 58.6% over the past year, there’s clearly less slack now, which ought to accelerate wage gains.

Economists at UBS have advanced another idea. They point out that the average age of U.S. workers has stopped increasing in recent years—perhaps because baby boomers are beginning to retire—so a rising premium for more-experienced workers is no longer embedded in wages.

But they add that this theory isn’t quite satisfying.

Federal Reserve Bank of San Francisco economists, meanwhile, have pushed a view that the labor market is experiencing a phenomenon called pent-up wage deflation. This works as follows: Because companies were unable or unwilling to cut wages during the downturn despite an extremely weak labor market, they haven’t had to raise wages so much since. Indeed, this week, those economists presented evidence that industries that were able to adjust wages lower in the recession have since raised them by more. The implication is that once this pent-up deflation passes through the system, wages could start climbing rapidly.

But wage growth is currently so low the Fed can afford to wait to see it actually pick up. Indeed, to be consistent with the Fed’s 2% inflation target, wages would need to be increasing by 3% to 4%.

The view of most Wall Street economists that the central bank will begin raising rates in June is looking a little tenuous, especially with falling energy prices cued to push overall price measures into outright deflation. Yet if hiring strength continues, unemployment could easily fall to 5% by the time Fed policy makers gather in June.

It could be a very interesting meeting.