Wage growth remains sluggish
Jeff Dworkin, a Dallas builder, was surprised to find someone he didn’t recognize inside a half-finished house this winter where crews were about to texture the home’s drywall.
That’s how Dworkin, president of JLD Custom Homes, discovered that the chief of a rival subcontractor was there trying to steal his workers.
“He was driving around and saw a rig, and he went inside to offer our guys more money,” Dworkin said. “These guys know, even though they may not be well educated or even speak the language, that they can work for the next guy and make $150 a day instead of $100.”
Even as the unemployment rate moves slowly downward, wage growth remains sluggish nearly five years after the recovery officially began, and has become one of the economy’s most conspicuous weak spots.
But there are now signs that the labor market is starting to tighten enough that workers may finally get some real raises that significantly outpace inflation.
“I do think there are signs wage growth is picking up,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi was pessimistic this year about any acceleration in wage gains before 2016, but now he predicts that last year’s after-inflation growth of 0.8 percent will rise to 1 percent this year and 1.1 percent in 2015.
“I think we can say definitely the slowing in wage growth is over.”
Those gains are still modest, especially considering that median family incomes, adjusted for inflation, fell about 10 percent during and after the recession. The typical worker is recovering only slowly from that loss. Over the past 12 months, nominal hourly wages are up a modest 2.1 percent, which works out to an after-inflation rate of about 1 percent.
In the second half of the 1990s, when unemployment fell as low as 4 percent, competition for workers helped drive up real wages and salaries for the worker at the middle of the income ladder roughly 1.5 percent a year, the fastest sustained pace in decades. With the labor market so tight, wages for workers at the bottom of the income scale rose even faster, about 2 percent a year above the rate of inflation.
But with the jobless rate now at 6.7 percent, the labor market is still not nearly as favorable to ordinary workers as it was at the end of the last century.
The idea that wages are about to accelerate is far from unanimous among economists. Among those who believe the evidence is still lacking is Janet L. Yellen, the newly installed chairwoman of the Federal Reserve, who said at her first news conference after taking the helm that most measures of income growth had shown little movement. She said 3 to 4 percent nominal wage growth would be normal if inflation, now running barely over 1 percent on the Fed’s crucial measure, rose to the central bank’s target of 2 percent.
Moreover, even as the economic cycle continues to advance, powerful underlying forces — including a relatively strong dollar that contributes to an outsourcing of jobs abroad — are helping to hold down pay increases.
“The upward pressure on wages will be there, but I’m not sure it will be fulfilled in a competitive worldwide market,” said Bob Funk, chief executive of Express Employment Professionals in Oklahoma City, one of the nation’s largest staffing firms. At Express, which places mostly light-industrial workers, the average hourly wage of its job finders rose only 7 cents in 2013, or less than 1 percent, to $11.41, he said.
The March unemployment rate showed average hourly wages dropping a penny, to $24.30, after a 9 cent gain in February, but with hours worked increasing, total pay continued to gain ground.
And there are signs of region-by-region, industry-by-industry wage moves percolating under the surface. In early March, the Fed’s Beige Book, a survey of conditions in various regions around the nation, reported that a third of the businesses in the St. Louis Federal Reserve district reported that pay picked up in the last three months.
It also cited multiple reports of labor shortages in construction, even though the building industry is still down 1.8 million jobs from 2007. Wages in home construction are up 5 percent in the last year. And some companies in the hottest regions of the economy are having to pay even more to attract capable workers.
“In the last five months, the labor price went up 20 to 25 percent,” said Daniel Esqueda, whose Wallco Drywall in Lewisville, Texas, has been losing workers to Texas’ booming oil patch. “It’s a nightmare right now.”
A nightmare to him, perhaps, but encouraging news for workers. And other regions with rapidly improving economies are reporting sharp movements in pay as well, especially if they are home to a hot sector like the technology industry.
In Northern California, wages are beginning to soar, not just for software engineers but even for people employed in fast food and retailing. In San Mateo County, at the northern end of Silicon Valley, average wages rose 9.9 percent in the year that ended Sept. 30, the most recent data available, and the fastest wage growth for a county in the nation, according to the Labor Department. San Francisco is close behind, ranking 10th of 335 counties tracked, with 4.8 percent wage growth.
“You walk down University Avenue in Palo Alto and you see help-wanted signs in all the low-wage service shops,” said Stephen Levy, director of the Center for Continuing Study of the California Economy. “That’s the first sign people have moved on to better jobs.”
Across the country, the number of metropolitan regions at or near the 5.5 percent unemployment rate — a signal that an area is moving closer to the full employment zone — is growing rapidly, said Joel Naroff, president of Naroff Economic Advisors outside Philadelphia.
“Labor supply is like housing or anything else: It’s local,” Mr. Naroff said.
Madison, Wis., has 4.5 percent unemployment and the nation’s second-fastest wage growth, Labor Department statistics show. Collier County, Fla., anchored by Naples, has the nation’s third-highest wage growth, as rebounding housing and stock markets have pushed local unemployment down to 5.6 percent from 9.8 percent in the summer of 2012.
And several cities in Texas and North Dakota, buoyed by the shale oil and gas drilling boom, reported raises well above the national trend in the third quarter of 2013, the most recent period for which detailed statistics are available.
For all the encouraging signs in especially tight local markets, however, wages in the vast array of low-paying services generally remain modest. Don Fox, chief executive of Fire House of America, a 750-store sandwich chain based in Jacksonville, Fla., says his franchisees in the Texas oil belt have had to pay $10 to $15 an hour to get workers. But at company-owned stores in North Florida, where unemployment is about 6 percent, there is not much wage pressure yet and he is able to get away with paying little more than the state minimum wage of $7.93 an hour, which went up 14 cents at the beginning of the year.
But even there, he is feeling a greater need to make his jobs more appealing. This year, he offered health insurance to lower-ranking store workers, and twice as many people signed up as he expected.
“That was a $4,000-a-year raise right there,” Fox said.
Signs of wage pressure concern some experts, who worry that it may lead to inflation. But many analysts, including the middle-of-the-road Zandi and Jared Bernstein, a left-leaning economist who served as an adviser to Vice President Joe Biden, dismiss the inflation threat, arguing that growing business investment to enhance productivity and expand sales will offset higher labor costs.
One example is Gap Inc., which is raising the pay of its 65,000 lower-wage workers (out of its total of 90,000 in the United States) to $9 an hour this year and will increase it to $10 an hour in June 2015.
The Gap acted partly because a shift to more business online made it essential to have higher-skilled and better-trained workers in its stores. The retailer’s expansion into selling clothes online for customers to try on in the stores, said Bill Chandler, senior vice president of corporate affairs, means the company will rely on employees to encourage customers to buy accessories and other clothes when they pick up their orders.
“We’re not quantifying the cost,” Chandler said, “but we’re confident we can meet it while continuing to deliver results for our shareholders.”
In the end, however, only a growing scarcity of qualified workers — not the generosity of employers — will lift pay more broadly.
“You can always get workers,” Naroff said. “You just have to pay them.”