With the string of negative economic data this week, investors were bracing themselves for disappointment. The actual jobs report has proven that concern was warranted.
Only 136,000 jobs were added in September, lower than expectations of 145,000; and wages increased by just by 2.9% for the year, the weakest growth since July 2018. The best part of the report is the fact that the unemployment rate fell – unexpectedly – to 3.5%, its lowest level in 50 years.
But the low unemployment rate brings up a long-running and puzzling question – namely, the lack of significant wage gains. Productivity is increasing as Americans work more hours, but their wages are not reflecting that effort.
So why are wages not growing at a faster pace?
Income inequality
The gap between productivity growth and a typical worker’s compensation has grown significantly since 1979, with productivity increasing six times more than pay, according to the Economic Policy Institute.
Prior to 1979, there was a strong correlation between productivity and wage growth. From 1948 to 1979, productivity growth was 108.1%, while hourly compensation went up 93.2%. But the gap has been widening since 1979. Productivity went up 69.6% from 1979 to 2018, but hourly pay grew by just 11.6%, according to EPI.
Top earners set wages for the rest of the labor force. “They’re the ones who want more power in the economy. So the top 1%, their incomes are not only from the labor market, their incomes are also from owning businesses and stocks and other capital investments,” says Elise Gould, senior economist at the Economic Policy Institute. “So as workers have less power, a lot of that power has been concentrated in the hands of a few.”
Since 2007, wage growth has been strongest for workers in the top 10% of the wage distribution, according to the EPI. More recently from 2017 to 2018, median wages increased 1.6% over the year, while workers with the highest wages (at the 95th percentile) saw their wages grow 2.7%.
Economy favors employers
The number of unemployed people per job opening is 0.8, according to the latest data from the Bureau of Labor Statistics. That means that employers should be fighting for workers.
Yet many workers are still not in a position to leverage those labor shortages into wage gains. “The Great Recession was pretty deep and some people feel just lucky enough to hold onto a job. They may not be asking for raises and employers still feel like they have all the power because they did for so long,” says Gould.
Workers are contending with less bargaining power as unions have weakened and the prevalence of non-compete clauses has made it harder to switch jobs in pursuit of wage gains.
“One of the reasons why you get wage increases is you get a competing offer from another company. You get another offer and you either leave and take that job or you try to negotiate with your employer. But there has been a rise in people across the economy being forced to sign non-compete agreements which keeps them from being able to use that outside option to be able to get higher pay,” says Gould.
The Illinois-based sandwich chain Jimmy John’s agreed to stop requiring workers to sign non-compete clauses in 2016 after the New York Attorney General said the practice was “unlawful.” State attorneys general across the country are also investigating fast-food chains that require workers sign non-compete clauses as a condition of hiring.
Low-wage industries see highest wage growth
Twenty-nine states – including Maryland, California, Massachusetts, and New York – have a minimum wage higher than the federal minimum wage of $7.25. And the move to raise state minimum wages has positively impacted lower-wage industries.
And in the latest jobs report, lower-wage workers fared better than high-wage workers in terms of wage growth. Workers in low-wage industries saw wages rise from 3.56% in August to 3.62% in September, compared to middle-wage industries where wages dropped from 2.47% to 2.125%, and high-wage industries where wages fell to 3.17% from 3.5%, Morgan Stanley pointed out in a note.
Recession concerns
The CEOs of America’s largest companies have blamed Trump’s tariff policy for impacting sales and creating an uncertain environment where companies have pulled back on hiring. The retail and manufacturing sectors were hardest hit in September, with retail shedding 11,400 jobs, and manufacturing losing 2,000 jobs.
“This slowdown in employment is likely to cause household spending, which has been the bright spot in the economy, to moderate,” said Barclays’ chief U.S. economist Michael Gapen, who says there is a 25%-30% chance of a recession next year.
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