United States: Wage growth evident, but productivity growth still missing Global Economic Outlook, Q2 2017
With unemployment at low levels, American workers are experiencing the highest average real wage increases since the recession, although the gains are uneven across industries. Continued increases will likely require a pickup in productivity.
Explore the Q2 2017 Outlook
Although growth was anemic during the first quarter of 2017, with GDP growth coming in at only 0.7 percent (annualized basis), there was improvement in two components of the economy: business investment and exports. In 2016, as a whole, real business investment subtracted from growth for the first time since 2008, while the contribution from real exports was nearly zero in both 2015 and 2016. As shown in figure 1, both of these sectors rebounded during the first three months of this year, contributing 1.1 and 0.7 percentage points, respectively, to growth. Many consumers, however, decided to take a breather, as reflected in the lower contribution from real personal consumption in Q1. Interestingly, personal consumption dropped, even as real disposable personal income continued to grow at an annualized rate similar to that seen in 2016. Many Americans were evidently feeling a little thriftier at the beginning of 2017, as they raised their savings rate instead of spending. The 0.2-percentage-point contribution from personal consumption was the lowest since emerging from the recession in 2009.1
One bright spot in the US economy continues to be strong growth in employment matched with mild to moderate growth in real wages. In the first three month of 2017, job growth averaged 178,000 per month, just under the 2016 pace of 187,000 per month. The unemployment rate fell to 4.5 percent in March, and other measures of labor force health also continue to move in a positive direction:
- After falling to a low of 62.4 percent in September 2015, the labor force participation rate has risen somewhat and appears to have stabilized at around 63.0 percent. This rate began to decline in early 2000, falling from around 67.0 percent to 66.0 percent in 2004, where it remained until the onset of the recession. The most recent rate decline is only partially accounted for by an aging population; there are certain cohorts of pre-retirement individuals, such as middle-aged white men, that have experienced declines not related to retirement during this post-recession period.
- The more expansive measures of unemployment, such as including part-time workers who would rather be working full time as well as those who have stopped looking for work in the last 12 months, have almost returned to pre-recession levels.
- The number of unemployed persons per job opening is back to its pre-recession level. The number of job openings (measured at the end of the month) has exceeded the number of hires (measured throughout the month) for most months since January 2015—a deviation from the historical pattern.2
One bright spot in the US economy continues to be strong growth in employment matched with mild to moderate growth in real wages.
Adding to sustained improvements in employment are rises in hourly wages. As shown in figure 2, low rates of inflation helped translate moderate increases in nominal wages to real wage increases in 2014 and 2015. Even as the impact of falling oil prices waned in 2016, a higher nominal wage increase of 2.9 percent sufficiently offset the 2.1 percent rise in inflation to allow for a 0.8 percent increase in real wages.
Table 1 shows the changes in nominal and real wages for selected industries. While the wage rise is partly attributable to general rising demand, there are also underlying shifts in detailed industry and occupational composition. For example, leisure and hospitality industries have had the strongest wage growth of any of the industries, but, given the relatively low average hourly wage in this sector, the strong growth has the result of bringing down the overall average. The relatively slow growth in wages in health care industries reflects the strong growth in lower-paid health care segments such as home health care services relative to the growth in higher-wage segments, such as hospitals.3 In industries such as mining and manufacturing, which had slow to negative employment growth between 2014 and 2016, the greater-than-average wage increases reflect a shift to occupations in industries that require higher skills.
Given the growing tightness in the labor market, for noninflationary wage growth to continue, productivity will need to increase. However, as shown in figure 3, productivity growth during the last three years has been very slow.
At least three policy goals of the current administration have the potential to improve productivity: infrastructure spending, tax reform, and regulatory reform. However, until the details of how any of these would work are decided, it is uncertain as to how much they will be able to reverse recent productivity trends.
At least three policy goals of the current administration have the potential to improve productivity: infrastructure spending, tax reform, and regulatory reform.