America's Economy is Recovering from the Recession, But One Area is Lagging

Job growth? Sure, but what are those jobs paying?

When the Great Recession hit in 2008, millions of Americans ended up losing their jobs, but since then many of us have found work again and are able to meet our financial obligations without unemployment benefits or involuntary part-time work. The nation's unemployment rate has fallen below 4% for the first time in nearly two decades. But are the jobs that we have now paying higher wages?

While the recent job growth has been encouraging, wage growth has been less than optimal. As Aparna Mathur, scholar of jobs and labor markets discusses, finding out why wages are not growing is important for our economy moving forward; there is one explanation she believes may explain the issue.

An interesting explanation for this conundrum might lie in a 2017 study by the Federal Reserve Bank of San Francisco. That study finds that while wage growth for continuously employed full-time workers has risen in line with pre-recession trends, aggregate wage growth has been held down by the entry of new or returning workers to full-time jobs. In general, workers who are moving from involuntary part-time work or unemployment to full-time work are much more likely to receive lower wages, relative to workers who have continued in their positions.

Over the past year, the number of people in involuntary part-time work has fallen by 6 percent, and total employment, especially in full-time jobs, grew. The effect of this won't be immediate, but over the long term that will eventually show an increase in average wages.

Mathur also notes that there is a wide variance among wage growth in different sectors of the economy. In industries like construction and financial activities, wages have grown by about 3.2 to 4.6 percent. Other sectors like retail trade, leisure and hospitality, and education and health services has lower growth rates around 2.5 percent and 2.9 percent. Why is that?

Construction and transportation and warehousing are also among the sectors with the highest employment growth over this period, while retail, leisure and education and health experienced much more modest employment growth. If the economy continues to add relatively more jobs to higher paying sectors than to lower paying ones, this should start to show up as an increase in aggregate wage growth as well.

Though wage growth has been sluggish, the picture isn't all bleak. It may just take some time for the new jobs' wages to catch up with the rate of growth. One of the things that Mathur is most concerned about is if the Federal Reserve decides to hike interest rates, which could slow down wage growth even further.

Interest rate hikes could slow down the pace of job creation by firms due to the higher costs of financing investments and activities that firms would face as a result. Such hikes would also increase the costs for the federal government on the more than $16 trillion of federal debt held by the public. This would eventually be paid for by workers, consumers and firms through higher tax payments or other means.

The good news is that the Fed does not seem likely to hike interest rates that quickly. If changes are made, they will be more gradual, allowing job growth and wage growth to continue. So though wage growth is behind where we'd all like for it to be, Mathur believes that we are headed in the right direction, and that Americans can expect to have higher wages in the future.

Comments