Over the past few years, I have consistently argued that wages were on the verge of moving higher. Earlier this year, we looked at how increases in state and city minimum-wage laws were driving the wages of the lowest-paid decile of workers higher. Today, we are going to look at some of the factors driving the middle of the pay scale higher. At a later date, we can analyze what has been responsible for gains driving the top of the pay scale.
The current economic environment — with increased hiring but without much wage growth — has been developing since the great financial crisis ended. We continue to read stories anecdotally about pockets of wage gains in certain industries or areas. (Look at what rising competition is doing for forklift drivers' hourly wages, in Bloomberg Businessweek.)
But to understand what might happen with wages over the next 12 to 24 months, we need to consider the full spectrum of employment data. To get a richer sense of the state of the labor market, let's review five data points.
Unemployment rate: The gradual recovery since 2010 has led to a tight labor market, as unemployment fell from 10 percent to 4.1 percent. If the unemployment rate chart were a stock trend, every investor would want to be short it.
Under normal circumstances, 4.1 percent would be full employment. However, these are not normal circumstances. Recoveries after a credit crisis are different from the normal cyclical recession recoveries (see e.g., this and this). Those differences manifest themselves in many ways, including delayed retirement and (I suspect) increased number of former workers on disability.
Labor-force-participation rate: The civilian labor-force-participation rate peaked in the 1990s, and has been falling steadily ever since.
There are many factors that have been driving this lower, including demographics. The gender differential is noteworthy: For men, labor-force participation began moving steadily lower right after World War II around 1948; for women, it peaks around 1999, started drifting lower and then really took a leg down after the financial crisis.
After that crisis, many frustrated workers decided to leave the labor force rather than accept a significantly lower-paying job. These folks are not retired or on disability, but simply become NILFs ("not in labor force"). There have been recent signs that they are coming back into the labor pool.
Quits rate: This technically measures the rate at which people leave one place of employment for another. What the quits rate really measures is employee confidence. It includes their expectations of getting a better-paying job, or finding employment with better benefits or working conditions. Individually, it is their subjective reflection of the state of the economy, a self-assessment of how scarce and therefore valuable their skills and experience might be. Collectively, it is an overall confidence measure.
After bottoming in May 2009 at 1.3 percent, the quits rate has gradually improved, and now sits at 2.2 percent.