Big Wage Gains Are Unlikely, San Francisco Fed Says

The U.S. economy’s very hot job market is unlikely to spark big wage gains soon, new research from the San Francisco Fed says.

In the paper released on Monday, bank economists sought to understand why a job market that is below most everyone’s estimate of sustainability still isn’t driving up wages in the way the textbooks say it should.

The U.S. jobless rate hovered right around 4% throughout 2018 and now stands at 3.9%. That is under the 4.4% level Fed officials collectively estimate is the long-term rate. What’s more, Fed officials expect to the see the jobless rate fall further, to 3.5% this year, and staying under 4% through at least 2021.

Hot job markets make workers increasingly scarce. That in theory puts power in the hands of job seekers, who are better situated to demand higher wages from current bosses, or who can leave to find better paying jobs. Fed officials have reported for some time that employers are finding qualified workers increasingly hard to find, yet wage gains have shown only modest improvement.

In December, wage gains were up 3.2% for the year, a good performance, but still relatively modest in light of the unemployment rate.

The San Francisco Fed paper took a look at state-level job markets, given that there have been episodes of sub-4% unemployment in some states. There is “little evidence supporting the contention that wage growth sharply rises as the labor market reaches especially tight conditions,” the paper’s authors write.

The paper says the state-level data suggest the interaction between unemployment and wages is linear, which means wages rise with falling unemployment in a pretty much steady relationship. Put another way, a steady improvement in unemployment means a steady improvement in wages, but no surges.

Modest wage gains have bedeviled Fed policy makers for some time. They’ve been raising rates since the end of 2015 and boosted the cost of short-term borrowing four time last year. One of the biggest drivers of the campaign has been to tamp down on potential inflation pressures resulting from the strong job market.

And yet, those inflationary pressures have failed to materialize. Now, an unsettled global economic landscape, volatile markets and still modest inflation call into question whether the Fed can deliver its projected two increases this year. The San Francisco Fed paper suggests that wages are unlikely to put a lot of pressure on inflation to exceed the Fed’s 2% target.

The research does acknowledge that what’s being seen now may change. One force blunting better wage gains in a state with a hot job market could be other states. When jobs are plentiful nationwide, other outcomes are possible, the paper says.

“Geographical labor mobility — which can mute wage pressures in tight markets as workers are attracted to higher-wage areas — may be playing less of a restraining role” when the job market is very good nationwide, the paper noted.
Source: Dow Jones