Unemployment easing, but wages remain flat or worse

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WASHINGTON – The questions hanging over Labor Day 2014 are whether and when America gets a pay raise. Ever since the 2008-09 financial crisis, the job market has been in a state of heartbreaking weakness. But the worst now seems to be over.

As Janet Yellen, chairwoman of the Federal Reserve Board, recently noted, monthly increases in payroll jobs have averaged 230,000 in 2014, up from 190,000 in 2012 and 2013. The unemployment rate dropped to 6.2 percent in July from 7.3 percent a year earlier and a peak of 10 percent in October 2009.

Gains are also reflected in cheerier (or less gloomy) popular attitudes, says public opinion expert Karlyn Bowman of the conservative American Enterprise Institute. A year ago, Gallup found that 29 percent of workers feared being laid off; that’s now 19 percent. (Millennials are exceptions; their unemployment fears rose slightly.) In March 2010, 85 percent of Americans judged jobs “difficult to find,” reports a Pew survey. In July this year, the figure was 62 percent. Although confidence hasn’t returned to pre-recession levels, there’s been a genuine improvement in mood, says Bowman.

What’s missing are wage increases. Since late 2009, hourly earnings have risen at an annual rate of about 2 percent, but when corrected for inflation, “real” wage increases vanish, reports the Economic Policy Institute, a liberal think tank. EPI says that median hourly wages were actually 0.4 percent lower in the first half of 2014 than in 2007. Using a different inflation adjustment (the “deflator” for personal consumption expenditures instead of the consumer price index) produces a 1.7 percent gain over the same period, says Scott Winship of the Manhattan Institute. Either way, wages are basically flat.

We should do better.

The Great Recession shifted bargaining power to employers. With jobs scarce, “workers just take what they can get,” says economist Dean Baker of the Center for Economic and Policy Research, a liberal think tank. Companies have controlled costs through layoffs, skimpy wage increases and greater reliance on independent contractors, which often pay less and provide fewer fringe benefits. The unwritten post-World War II labor contract – in retreat since the late 1970s – finally expired. That contract presumed that large companies would provide workers with stable jobs and “real” annual increases in wages and fringe benefits.

Forget it. Wage increases aren’t guaranteed, and longtime workers are regularly dismissed. “There really is no security in the labor market,” says former Fed economist Stephen Oliner, now at AEI. On the labor market’s edges, firms like Uber (an on-call transportation company) and TaskRabbit (an online service that allows customers to solicit bids for specific jobs) have created digital markets for freelance workers. The temporary jobs provide cash and flexibility – but not much certainty or security.

Too many workers have chased too few jobs, weakening wages. But now the pendulum may be swinging in workers’ direction. Some economists contend it already has. Two bits of information are routinely cited: the unexpectedly fast fall in unemployment; and the rise in reported job openings to 4.7 million in June, more than double the recession low and slightly higher than the pre-recession peak.

The worry is that the growing supply of openings and the shrinking pool of available workers might trigger an inflationary wage-price spiral. This seems premature. Other economists, including Yellen, have argued that there’s still substantial labor market “slack” (surplus workers wanting jobs), keeping a lid on wage gains. Their evidence seems stronger. Consider the U-6 jobless rate (U-6 includes the officially unemployed, discouraged workers and part-timers who want full-time jobs). In July, it was 12.2 percent, down from a monthly peak of 17.2 percent, though still higher than 2007’s 8.3 percent, before the recession.

But suppose we are nearing an inflection point, where worker supply and demand are in closer balance. That certainly wouldn’t be bad. Workers’ bargaining power would improve with tighter markets: markets where businesses have to pay a bit more to keep employees; where younger workers might have competing job offers; and where someone could quit with a reasonable expectation of finding another job. Note that unions aren’t a plausible alternative to markets because they represent only 7 percent of private workers.

A wage explosion seems unlikely; companies were too traumatized by the Great Recession to let costs get out of hand. Even in 2007, wage increases (unadjusted for inflation) were running only at about a 3.5 percent annual rate.

What’s ultimately at stake is the Great Recession’s lasting effect on labor markets. Are they in the process of reverting to their modern role, promoting steadier employment and higher living standards? Or has there been a major break from the past, ushering in a harsher, more arbitrary system whose outlines are still faint? On this Labor Day, the verdict is unclear.

Robert Samuelson is a columnist for The Washington Post. © 2014 The Washington Post Writers Group.