To be fair, there has been some movement in the inflation metrics. The most commonly referred to gauge of inflation is the Consumer Price Index, which has risen from zero in 2015 to 2.8 percent most recently. However, our focus is on a more nuanced measure of inflation: average hourly earnings (i.e. wage inflation). Average hourly earnings is calculated by the Bureau of Labor Statistics and is defined as the average amount an employee in the U.S. makes per hour in a given month.
One practical model, the Phillips Curve, contends there is an inverse relationship between the rate of unemployment and the rise in wages. Thus, it would be expected that, as unemployment in the United States hits multi-decade lows, there should be a corresponding increase in labor costs as businesses compete for skilled labor and reward employees to increase retention. However, this hasn’t been the case. In fact, over the last few years, average hourly earnings has trended in a less than one percent range between 2.2 and 2.8 percent growth – hardly the jump that would be expected from a sub-4 percent unemployment rate.
This begs the question – which part of the equation is broken? Employment has been consistently improving since 2009; when the unemployment rate reached 10 percent. The same trend can be seen in the more narrow measure of labor force that focuses on part time job growth. In the past, a divergence in these two measures would call into question the quality of the prevailing employment picture but that doesn’t seem to be the case. One employment trend that has emerged is the rise in service jobs versus traditional manufacturing jobs. However, the global economy has evolved and thanks to demographic trends, technological innovation, and the “gig” economy this is not a surprise.
So, it must be the wage portion of the equation? This seems more likely for some, but not all, of the aforementioned reasons:
Technology is often scapegoated as the term is broadly interpreted as “automation”. The automation argument may be true in some cases. In fact, we enjoy new efficiencies in everyday life as we travel through the airport or order at a restaurant. However, a slew of high wage jobs are required to develop the new technology to automate away less skilled workers. Ultimately, this may put upward pressure on wage costs.
Demographics or the “juniorification” of the workforce. The “baby boom” generation has earned a break and it is time to enjoy the fruits of their labor. According to the Pew Research Center, Millennials (20-35 years old) are projected to overtake the Baby Boom (52-72 years old) as the nation’s largest living adult generation in 2019. As the older generation “passes the baton” of responsibility it is very unlikely that they are passing the salary and benefits packages that came with it in the past. In today’s world companies are looking to save costs in every area. They no longer offer expensive defined-benefit pension plans and high-deductible health plans are becoming the norm, to cite just two examples.
The “Gig” economy refers to the new class of workers that chose lifestyle over the traditional work environment (i.e. Uber). This group includes people that work at will and as needed. Participants in the “gig” economy set their own schedules, work as frequently (or infrequently) as they want and are responsible for their own overhead costs (insurance etc.). So while they are “employed” this remains a very difficult cohort to quantify.
Ultimately, it still remains to be seen whether the perpetually low rates of the last ten years can spur inflation. Regardless, the sound underpinnings of the domestic economy provide a supportive background for the Federal Reserve to continue on a measured path of interest rate normalization. While we don’t claim to know if or when real inflationary pressures will surface, we continue to closely monitor a number of indicators for the telltale signs.