Pay Raises for Low-Income Earners Shows Strength in US Economy

We are now almost a decade into a recovery from the worst US recession in generations, and investors everywhere continue to wonder when “the other shoe is going to drop.” That feeling is understandable when you consider that the average economic expansion historically has been about four years, and this recovery is now more than twice that amount.

However, time alone may not be the whole story. All you have to do is compare this particular expansion with previous recoveries, and it’s immediately apparent how slow and tentative it has been.

Source: Federal Reserve Bank of St. Louis

 

The labor markets have been slow to turn around as well. Unemployment rates stayed stubbornly high for years before finally descending to their currently respectable levels. And, even as the official measure improved, many pointed to other weaknesses in the labor markets that aren’t captured by the unemployment rate, such as workers who have given up entirely in looking for a job.

Another important labor market gauge that had reported little to no improvement until recently is wage growth. After all, an employee’s income that stays flat while inflation rises is effectively a wage cut in real purchasing power terms. And even when we finally did start to see some wage growth, it was largely only in the highly skilled sectors of the work force, where those with specialized skills can demand higher wages simply due to lack of supply.

It looks like things are starting to change, however. According to a recent article in the Wall Street Journal

Weekly pay for earners at the lowest 10th percentile of the wage scale rose at a faster rate last quarter, from a year earlier, than any other group measured by the Labor Department—including those at the top of the income scales who earn five times as much. The shift for low-income workers—including restaurant workers and retail cashiers—who make about $10.75 an hour, is a sign that a tightening labor market is delivering better pay to workers who largely haven’t shared in gains since the recession ended eight years ago, according to economists and government data. Last quarter marked the first time since late 2010 that this earning group’s gains outpaced all others.

Wage growth for all workers fell precipitously coming out of the recession, but signs of a pickup for the highest earners emerged as early as 2014. Economists have been predicting that all workers would eventually also participate in the recovery, but that has been lacking from the data until now.

Chart source: Wall Street Journal

Job experts seem to be seeing the same thing. The article went on to interview a labor economist from the employment website Indeed.com…

Wages have been rising swiftly in fields such as restaurants, amusements and gambling, said Jed Kolko, economist at job-search site Indeed. That is an indication that employers need to pay more to attract workers into those fields. “In a strengthened economy, people spend more on entertainment and eating out, raising demand for workers in those fields,” he said.

With U.S. stock markets continuing to make new highs, wage growth is a positive sign for the economy, which needs to grow to support current valuations. In our most recent investment newsletter, we discuss in more detail how we see the U.S. stock market, but signs of broad wage growth are a net positive for the markets today.