For all the positives in the latest U.S. jobs report, employees and the Federal Reserve didn't get one thing they’ve been looking for: higher wages. Therein lies a central conundrum of this economic expansion.
The February employment report suggests that the economy weathered January's stock-market turmoil in decent shape. Nonfarm employers added an estimated 242,000 jobs, and the unemployment rate held steady at a low 4.9 percent. The demand for workers, though, didn’t translate into better pay. The average hourly wage actually dropped 3 cents to $25.35. That left it up just 2.2 percent from a year earlier, well short of the pace that prevailed before the recession.
So where will the raises come from? One odd fact about the current expansion is that workers' total income growth, meager as it is, has outpaced the broader economy. Since the recession hit bottom in mid-2009, the combination of hiring and increased wages has caused aggregate weekly earnings of production and nonsupervisory workers to grow at an average annualized rate of 4.2 percent, well exceeding nominal gross domestic product growth of 3.7 percent -- something that hasn't happened in any of the previous four recoveries. Here's how that looks:
For pay to accelerate, the economy needs to pick up the pace. One way that can happen is if workers start to spend more of the income gains they've already received -- something we saw a hint of in January's stronger-than-expected increase in consumer spending. Also, productivity is crucial: The more workers produce for every hour on the job, the more companies can afford to pay them without increasing prices. So far, that's not happening. Nonfarm productivity has grown at an annualized rate of just 1 percent since mid-2009, less than half the average pace of the previous two decades.
The nature of the productivity slump remains a matter of much debate. Some economists think it will pass. Others, such as Robert Gordon at Northwestern University, argue that it's actually a return to the norm after a temporary boost driven by the advent of information technology. Still others, such as former Minneapolis Fed President Narayana Kocherlakota, think it might be curable with a combination of central bank stimulus and increased government spending, including on productivity-enhancing stuff such as better roads and other infrastructure. Barring a miracle, it's a quandary that the next president, whatever his or her political persuasion, will have to confront.