Today’s blog will run a little long because of data being included.
Although many of the media headlines tout the solid growth in jobs, what gets far less coverage is the slow growth in salaries/wages. Clearly, solid jobs growth is needed to build the foundation for sustainable economic growth and solid jobs growth should be celebrated. The point though: it is not jobs growth, in and of itself, that is important. Historically, solid jobs growth leads to solid salary/wage growth and since U.S. economic growth-as measured by GDP-is still dependent on consumer spending, it is salary/wage growth that is the important foundation for sustainable economic growth.
One thing that I have discussed in the past and is worth repeating is, when the Bureau of Labor Statistics (BLS) reports on the number of jobs added each month, they do not distinguish between a job that is 4 hours a week or a job that is 40 hours a weeks. A job is a job when it comes to calculating how many jobs were created and jobs creation is what hits the headlines. There is more detail behind the headline report, and from there, it is possible to gather some clues as to why salary growth has been slow. All data below is from the BLS database.
Clue #1: The difference between part-time jobs and full time jobs added since the recession started-December 2007-through July 2015.
The nation recovered all of the part-time jobs lost during the recession and has a net addition of 1,698,000 people who are holding down part-time jobs when they want full-time jobs. At the same time we have not recovered all of the full-time jobs lost. Since part-time workers often do not have any benefits associated with the jobs, intuitively, it would make sense that salaries (wages and benefits) would see slow growth.
Clue #2: Where jobs are being created.
One of the explanations for slow salary growth lies in the composition of jobs added from the start of the recession to now. What the data shows is, in general, we have a net loss in many of the higher paying jobs and have replaced those lost jobs with lower paying jobs. Here is a breakdown of how many jobs were added/(lost) for each indusry sector along with their average hourly pay rate.
Clue #3: Pay increases.
Examining the difference in pay increases among industry sectors helps explain slow jobs growth as well.
Cumulative change in average hourly earnings December 2007-July 2015:
As a whole, the sectors that had bigger jobs gains had lower wage increases than the sectors that lost jobs.
Clue #4: What small business owners are saying.
From an anectodal evidence standpoint, a common theme that I have heard from small business owners during the various economic presentations that I give is that small business owners have absorbed a higher percentage of the increased cost of benefits compared to what they passed on to employees. Because of this, there is less money available for wage increases.
As we look for clues for potential increases in economic growth the first place to start is to monitor salary/wage growth. As long as our economy is a consumer spending driven economy, wage growth remains the critical component for increased consumer spending.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.