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Why Jobs Growth No Longer Induces Wage Growth in America

July 20, 2017 • GLOBAL ECONOMY, Columns, Americas, Dan Steinbock

Or The Eclipse of the Phillips Curve in America

By Dan Steinbock

While the Fed’s continued tightening may suppress growth in emerging economies, US labor market may not be as strong as recent reports suggest.

 

US experienced strong job growth in June, when the economy created 222,000 net new jobs, which exceeded analyst expectations. At the Federal Reserve, the jobs report boosted confidence US economy is on the track for new rate hikes in the fall.

As the unemployment rate is barely 4.4%, the Fed expects that the US economy can cope with further tightening. Yet, despite the solid performance, not everything is in place for sustained job growth.

 

Temporal and Structural Constraints

In June, some jobs were fuelled by temporary drivers. The June gain of 35,000 jobs in state and local government was preceded by a loss of 8,000 jobs in the sector in May. Other June gains reflect school districts’ new hires for the fall. Moreover, the retail sector added over 8,000 net new jobs; but only after losing almost 80,000 jobs between February and May, as a result of the ongoing shift to online retailing.

Much job growth was due to hiring in healthcare, social assistance and local governments, which are coping with America’s aging and ailing population.

Usually, when unemployment is low, employers tend to increase wages to attract new workers and keep existing ones. That’s not the case today. Instead, some of the biggest job gains are taking place in lower-wage sectors, such as healthcare and temporary workers, which keeps wage growth down.

US recovery also suffers from structural constraints. The unemployment rate is relatively lowest among whites (3.8%) and Asians (3.6%), higher among Hispanics (4.8%), twice as high for blacks (7.1%) and far higher for youths (13.3%).

Usually, when unemployment is low, employers tend to increase wages to attract new workers and keep existing ones.

Moreover, the labor force participation rate – the number of people who are employed or actively looking for work – peaked at 67% in the early 2000s, but is less than 63% today; where it used to be in the mid-1970s.

Unlike labor force participation rate, the employment-population ratio is not as affected by seasonal variations or short-term fluctuation. In the US, it used to be almost 75% in the early 2000s; but today it is barely 60% as fewer young Americans are looking for work and baby boomers are retiring.

 
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About the Author

Dan Steinbock is the Founder of Difference Group and has served as Research Director of International Business at the India China and America Institute (US) and a Visiting Fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see http://www.differencegroup.net

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