It is true that job growth has been impressive. Official unemployment is down to 5.3% and the July job numbers were decent at about 215,000. Monthly job growth has averaged over 200,000 for some time Close to 12 million jobs have been created since the trough in non-farm payroll employment of about 129.7 million in the first quarter of 2010. The ratio of unemployed job seekers to job openings peaked in July 2009 at the very bottom of the recession at 6.8 to 1 and has since dropped to a mere 1.6 to 1 by June of this year. But what lies behind the impressive labor market performance. The answer is low wages.
American workers have paid the price for returning to work with lower real hourly compensation. According to the Economic Policy Institute "Over the year, average hourly earnings rose only 2.1 percent, in line with the same slow growth we’ve seen for the last six years. And wages for production/nonsupervisory workers rose even more slowly, at 1.8 percent over the year." The key here is that despite the dramatic decline in unemployment and the impressive rates of average monthly job creation, wage growth has been more or less flat, according to economist Josh Bivens of the Economic Policy Institute. Bivens points out that average annual productivity growth since 2009 has been between 1.5% and 2%, while the wages of non-supervisory workers has stagnated.
The connection between productivity growth and wage growth has been severed for some time. Since 1980, labor productivity has doubled while over all real median income growth has actually declined. Real hourly wage growth since the early 1960s has been anemic at best. According to the PEW research center, average hourly wage rates in 2014 chained dollars went from $19.18/hr in 1964 to $20.67/hr in 2014. or roughly 7.5%. Median weekly wage growth has been flat or declining for most of the work force between 2007 and 2012 despite productivity growth of about 7.7% over the same period. But profit growth has been high since the start of the recovery.
Labor's share of total annual corporate income has declined since a peak of 83% at the height of the 2008 recession to below 75% currently. The recovery since 2009 has shifted income from labor to capital as wages have risen only slowly, unit labor and other costs have been flat or have fallen a bit and profits have risen. Since the last business cycle peak in late 2007 until currently, prices have been profit driven, not cost driven labor or otherwise. According to Biven's study,
Since the last quarter of 2007, unit prices in the non-financial corporate sector have risen at an annual average rate of 1.3 percent. Within this, unit labor costs have risen at a 0.7 percent rate, other costs have risen at a 0.9 percent rate, and unit profits have risen at a 4.7 percent rate. This profit performance is extraordinary, particularly given the very sharp fall in profits during the Great Recession. Breaking down unit price growth shows that unit profits are responsible for 64 percent of the rise in prices since the last business cycle peak, even though in the last quarter of 2007 they accounted for less than 12 percent of total price increases in the non-financial corporate sector. (emphasis mine)
What has kept prices up over the course of a weak recovery with flat wage growth and low unit cost growth, Bivens concludes is profits. Profits push "inflation" is the reason there is any price growth at all, not wage growth or the drop in unemployment, and the Fed should acknowledge this before deciding to cut off what little wage gains have been made during the current recovery by suddenly raising the Federal Funds rate.
From Jobless Recoveries to Low Wage/High Employment Recoveries: So Much for the Wage Phillips Curve.
The wage Phillips curve measures changes in nominal wages against shifts in employment levels. The prediction is that as unemployment declines wages rise due to tightening labor markets. The reverse is also true; high unemployment depresses average wage levels. But this connection has been cut with the current recovery since 2009 just as the connection between productivity and wage growth was cut over the course of the Bush expansion from 2002-2008.
We are in a low wage recovery which itself slows growth by constraining consumer demand which in the US economy is the prime driver of any business cycle expansion. According to a study by the National Employment Law Project (NELP), even after six years of solid recovery, job growth has consistently been driven by low wage industries (those that pay between minimum wage and $13/hour with few if any benefits). The April 2014 study points out that even though low wage industries accounted for 22% of the jobs lost during the Great Recession, they account for 44% of the job growth between 2010, when there began a steady labor market recovery (as opposed to the output recovery that began in 2009) and the second quarter of 2014 when the study was published. By contrast, 40% of the net job growth during the post-2001 recovery was in the high wage sector (Over $20/hour) with another 21% in the mid range sector (Between $14 and $20/hour). In addition, there was a loss of over 627,000 public sector jobs during the 2008 recession while public sector employment actually continued to grow during the 2001 recession. Public sector employment is a boon to any economy because of its higher wages and benefits as well as its deep up and downstream linkages to the rest of the economy giving public sector employment a higher multiplier effect on overall growth.
Two years into the recovery, according to other NELP reports, the concentration of job growth in the low wage sector was even greater, nearly 60%. But the sudden rise in manufacturing and other employment, such as construction with the housing market recovery, later in the recovery raised the higher wage job share of employment growth. A surge in manufacturing employment played a large role in this development. But as another NELP study pointed out, "The public assumes that manufacturing jobs are highly paid, but the reality is that millions of manufacturing workers are at the bottom of the wage scale."
During most of the post-WWII era, manufacturing jobs were among the best paid non-supervisory jobs in the private sector. Between 1950 and the mid-1980s when manufacturing employment began its steep decline from a peak of 19.5 million workers (to about 12 million today-only half of which are production workers), manufacturing wages averaged between seven to ten percent higher than the overall private sector average. By 2013, the average factory production worker's hourly wage was about 7.7% below the national private sector median wage. The November 2014 NELP study shows that, "...in 2013, there were approximately 6.2 million production workers in manufacturing. More than 600,000 of those workers make just $9.60 or less, and more than 1.5 million of those workers make $11.91 or less." Just over 3 million-or half of all production workers-made less than $16/hour by 2013. Far from the Conservative myth of millions of manufacturing sector workers making $30/hr, the vast majority barely make a living wage-the NELP report shows that over the past decade manufacturing wages fell faster than wages in other sectors. From 2003 to 2013, wages in manufacturing fell by 4.4%!
The auto industry has experienced the most growth in the US manufacturing sector since the start of the recovery. Foreign automakers are drawn to the US, mostly in southern "right to work" states where they can pay wages as low as $12 to $14 per hour for starting production workers. Nearly three fourths of auto industry workers in America are in parts manufacturing as opposed to auto line assembly, which has become highly automated with labor saving technology. Auto parts manufacturing is notoriously low paid, the median wage as of 2013 was about $16/hr. Where there is union representation in auto and auto parts manufacturing, the UAW has agreed to two tier wage agreements with lower wages for those newer hires. US auto production and other manufacturing is no longer the high wage sector it once was and foreign manufacturers are ironically investing in plant and production in the US due to low wages and benefits.
The hypermobility of capital and the drop in demand for labor in manufacturing due to labor saving technology and, to some extent, imports, has weakened the US labor movement dramatically. Even in the non-tradable sector like the building trades, union membership is down from its peak years ago as is real wage growth. The lower the average wage level the slower the recovery due to a lack of effective demand to drive consumption. Household debt probably is still what largely enables even the meager levels of growth we currently have this recovery. The power of capital over the labor market, its hypermobility and use of labor saving technology plus the continued chronic labor market slack has cut the connection between job growth and wage growth. The growing ratio of low wage jobs to total employment depresses wages and overall skill levels and helps create chronic high levels of unemployment and underemployment due to the high turnover in low wage industries. Restoring higher wages will take movement politics and efforts to restore legal union rights after decades of union busting by employers. Until then low unemployment figures will continue to baffle most of us regarding the stubborn continuation of low wages, slow GDP growth and a declining standard of living.