Why Aren't Wages Growing Faster?

Popular Economics Weekly

Graph: FRED

Interest rates are far too low for this late in the recovery from the Great Recession. We know this because the Treasury Yield Curve has been falling that measures the difference between the 10-year and 2-year Treasury bond yields. The difference is just 1 percent, when it has been around 2 percent during other prosperous times, as the FRED graph shows. It last was this low just before the last 2 recessions (gray columns in graph).

Why are interest rates still low? The simplest answer is there isn’t sufficient demand for what is being produced that would cause more borrowing, thus causing interest rates to rise. And though the Republican tax cuts have juiced profits of corporations and their stock holders, it hasn’t boosted the wages of ordinary consumers that power two-thirds of economic activity.

Consumers’ personal incomes are rising at the inflation rate on average, which means they don’t have sufficient income or savings that would cause them to increase their spending habits. It’s a difficult and maybe counter-intuitive concept. If prices are rising as fast as incomes, then consumers are also playing catchup in what they need to maintain their standard of living.

That is why economists worry that such low long term interest rates in particular could be a sign of another incipient recession. Banks cannot lend as much when their profit on loans is the difference between their cost of money and what they can lend at longer-term loan rates (such as mortgages and installment loans). So it means a shrinkage in the available credit.

The good news is that job openings are still soaring in the Labor Department’s JOLTS Report, which should boost wages. It is a survey of available jobs, vs. how many jobs have been created in June.
There were 6.662 million in June vs. an upwardly revised 6.659 million in May, reports the BLS.

Year-on-year, the number of job openings was up 8.8 percent. The number of hires remained well below job openings at 5.651 million in June, down from May's 5.747 million, while separations, which includes quits, layoffs and discharges, rose to 5.502 million from 5.419 million.

 

Graph: Econoday

That means there were more than 1 million jobs that remained unfilled, which has to put more pressure on employers to boost wages. So will inflation behave enough to allow an increase in real wages, which should be rising above the rate of inflation this late in the recovery from the Great Recession?

That has been the problem since the 1970s, really. The Fed wants to keep inflation low, so it raises interest rates whenever there is a sign that workers’ wages are rising faster than inflation. But this puts a damper on consumer spending, which in turn keeps economic growth in the 2-3 percent range, which isn’t enough to either pay down personal or government debts.

And social security trustees calculate the $3 trillion social security trust fund will be depleted by 1934, which would mean taxes must be raised to maintain current benefits before then. Does anything believe Congress will allow said benefits to shrink, with voting seniors just daring them to cut their benefits?

It’s much easier for the Fed to allow inflation to rise above its 2 percent target range before raising their interest rates to allow faster wage growth, which in turn boosts tax revenues. The social security trustees use a mid-range GDP growth rate of approximately 2.6 percent to calculate longevity of the SS trust fund.

GDP growth has averaged 3.5 percent since the 1930s, including the Great Depression. Why have inflation hawks at the Federal Reserve so slowed growth since the 1970s by boosting interest rates at the slightest hint of higher inflation, which in turn has kept GDP growth below its long-range potential?

The real answer is that pro-business, pro-corporate administrations since 1980 have severely limited collective bargaining and other pro-labor laws in the name of globalization, thus limiting wage growth.

That’s why such policies are called trickle-down economics. Very little of the national wealth created since then has trickled down to the 80 percent that are the real wage earners.

Harlan Green © 2018

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