Labor Market Sees Signs of Improvement, Yet Weak Wage Increases Persist

The labor market is showing marked signs of improvement while growth in wages remains lackluster.

Economic growth appears to be soft in the first quarter of the year, but employment is expected to improve this year and appears very solid, said Stuart Hoffman, chief economist for PNC Financial Services Group, the Pittsburgh-based financial institution, in a research note.

The job growth is predicted to be 185,000 each month, although the pace will trickle down throughout 2016 as it becomes increasingly difficult to hire as the economy approaches full employment, he said. The unemployment rate will decline from 5.0% in March to 4.7% in December, even as more people are hired.

The current labor force is absorbing the slack leftover from the Great Recession while a tighter job marker means there will be an acceleration in wages as companies will be forced to compete for scarce workers, he said.

A positive economic indicator occurs when inflation rises to the Federal Reserves target inflation rate of 2%, said Doug Cote, chief market strategist for Voya Investment Management, a New York-based financial institution.

An inflation rate of 2% means it is good for jobs, especially for people in lower income brackets and the economy is working toward full employment, he said. The Fed is still trying to get inflation up to 2% and will be patient. We are still not there yet.

The larger existing issue is that inflation remains too low currently and is a sign that economic growth is well below capacity, Cote said. It is well below the trend and needs to increase.

If inflation rose too high and reached 3%, it would put pressure on workers making lower wages who would have to spend more of their income on higher prices.

Determining the right target figure for inflation is becoming murkier, said Patrick Morris, CEO of New York-based HAGIN Investment Management.

The insanity of this cycle is that we are so off-book that I am not convinced that the Fed or anyone else really knows what it should be, he said. We dont want hyperinflation, but deflation is the real fear.

Why Wages Have Not Risen

One reason incomes have not risen is because productivity is also below trends, Cote said; that, in turn, increases the cost of doing business.

Companies cant raise wages higher than productivitys growth, he said. Workers productivity is low even though there is increased automation and software.

Long-term stagnant salaries are thwarting economic growth since 70% of GDP is derived from consumer spending, said C.J. Brott, founder of Capital Ideas, a registered investment advisor in Dallas, Texas and a portfolio manager on Covestor, the online investing marketplace.

Wages need to increase or income inequality will become a large issue.

If this condition continues, we will get a continuing hollowing out of the middle class, he said. The situation can remain stable as long as inflation remains tame. If we start to get creeping inflation, the political pressure of wage inequality will worsen.

If inflation rises, but wages remain flat, the situation would deteriorate even further, Brott said.

Some evidence of the economic pain associated with a lack of growth in the economy and real consumer buying power has been the expansion of food stamp and other government assistance programs, he said. Any real expansion in entitlement programs will increase pressure on government spending which at some point becomes a factor in increasing inflation.

Wages have not increased yet, because cash flow remains tight for companies as their clients are paying later and later, said William Melville, a labor markets research analyst for JMJ Phillip, a Troy, Mich.-based search firm focused on the manufacturing, supply chain and technology sectors.

Too many companies expanded too quickly after the recession, contributing to the current situation.

We went from 10% unemployment and stomped our way down to 4.9%, he said. Companies from 2008 to 2011 ran very lean on headcounts and did not make a lot of capital expenditures. In the last five years, companies have recovered all their headcount and then some, plus spent money on build outs, equipment and services.

Wage growth will be concentrated among longer-term, specialized workers, Melville said.

The employment markets are tough right now, because it is very hard to find educated, ambitious and motivated employees to fill roles, let alone specialized roles like engineering and computer science, he said. We expect to see more organic wage growth now that the low-hanging fruit has been consumed and companies begin to bid higher and higher for new hires in order to retain the top talent they have.