“The genius of investing is recognizing the direction of a trend – not catching highs and lows.”
~ John Bogle, Founder of Vanguard
Question: With unemployment rates so low, shouldn’t wages be higher?
Answer: It’s logical to expect wages to go up when the economy strengthens and the demand for workers increases. Economics 101 teaches us that if demand is greater than the supply, prices will go up.
As of March 2018, the Bureau of Labor Statistics (BLS) tells us that there are 6.55 million job openings and 6.85 million unemployed. The spread of only 35,000 doesn’t leave much wiggle room, suggesting that we are already at or presumably approaching full-employment levels. In April, the unemployment rate dropped to a 17-year low of 3.9 percent.
It’s important to consider that those 6.85 million unemployed workers do not include “discouraged” workers, or any part-timers interested in seeking full-time work. Also, some job openings may not match the skill-sets of those looking for work further contributing to any disconnects in the workplace.
Nevertheless, it’s evident that labor demand is strong, indicating that we have a steadily growing economy. One way to attract and retain qualified employees is to offer higher wages. Higher wages, if implemented too early in a business cycle could have the unintended consequence of pushing prices for goods and services upward. As a reminder, the root cause of inflation is too many dollars chasing too few goods which pushes prices upward. This is just another example of demand exceeding supply, much like our current labor market.
According to the National Federation of Independent Business’s April, labor continues to be the number one concern for employers. For many qualified and valued employees, permanent raises are occurring. Alternate ways that employers reward workers are overtime pay and bonuses. Automation and even artificial intelligence (AI) are also used to increase productivity in a tight job market.
The Job Opening and Labor Turnover Survey (JOLTS) is another way to track employment trends. JOLTS incorporates the number of hires, job openings and quit rates. With JOLTS that there are more job openings than workers available, you may expect wages to rise. Oddly, the “quits” rate seems flatter than the other measures. For it to make economic sense to seek employment with a competitor or to physically relocate for a position, works would likely requires better pay. This could be attributed to the fact that in contrast to previous generations, today’s workers are less likely to relocate for a new opportunity, and pre-retirees are less likely to job-hop, partially explaining the relatively flat “quits” rate, plus people are retiring later than expected for a variety of reasons.
Fortunately, wages are actually increasing although not as much as we may expect. The BLS reported that as of April 2018, average hourly earnings were up a respectable 2.6 percent year-over-year. This number doesn’t include any one-time bonuses companies paid to employees in response to the 2018 tax-cut legislation. Until employers are certain that economic growth is sustainable they’ll tend to remain cautious and hold-off on permanent wage hikes.
Another factor in the decision to raise wages is the labor participation rate. This measures the percentage of adults working or actively looking for work. At the end of April the rate was 62.8% which is down from the all-time high of 67.30% in January 2000 and 66.2% in early 2008. Reasons for the low participation rate include Baby Boomers transitioning into retirement, student loans deferrals that keep many in school, and record high numbers of disability claims that are just starting to decline. Some of these people could possibly be available workers for open positions now and in the near future.
It’s a delicate economic dance between higher wages, rising prices and increasing interest rates. If one variable becomes unbalanced the entire economy could stall. Wage increases and price inflation in the retail and consumer goods sectors remains relatively tame. This suggests that we’re not near an inflationary breakout; something the Fed is always on the lookout for and poised to manage with interest rate changes.
It’s a bit like the riddle, “Which came first, the chicken or the egg?” Until employers find that higher wages are necessary, other ways of obtaining increased productivity and output will be used. Meanwhile, Investors usually place emphasis on corporate profits and real inflationary pressures. Time will tell when wage increases will occur and at what point they begin to cause inflation. Stay focused and plan accordingly.
Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author’s opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.
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This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC, 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. Website: www.raymondjames.com/InvestmentInsights.