What's Missing in the Latest Jobs Report: Signs of Rising Wages

NEW YORK (TheStreet) -- Don't tell the midterm election voters, but full employment is nearly here. That leaves one question that matters most to Americans: When will wages begin rising again?

The answer isn't really in Friday's jobs report, which showed the nation's unemployment rate dropping to 5.8% in October as the economy added 214,000 new jobs, missing the average forecast of 231,000. The real news in the last couple of reports has been about productivity growth, and that news is increasingly good.

When Wall Street crashed in 2008, business investment collapsed and productivity growth went through its worst three-year stretch since the early 1980s. As Progressive Policy Institute economist Michael Mandel likes to say, productivity is where raises come from, and productivity comes from better factories, software and equipment.

Productivity's collapse is the major reason why inflation-adjusted median household incomes are still more than 4% below their pre-recession peak, according to Sentier Research. Now investment is recovering, productivity growth is doing better (though it still isn't great) and wages should be coming along soon.

"It is possible that inflation-adjusted earnings could rise at the fastest pace since 2007'' by the time the year is out,  Joel Naroff of Naroff Economic Advisors wrote Thursday. "That is a clear sign that the tightening labor market is forcing firms to pony up a little more money. "

You might not get that from looking at Friday's jobs report, which said average hourly earnings rose only three cents, to $24.57. That was the softest spot in a report otherwise filled with solid news.

This is the eighth month in nine in which the economy added more than 200,000 jobs. A 12,000-job pickup in construction jobs reflects a lurching but real recovery in the housing market. And boosts in middle-income industries like health care (27,200 jobs) and government employment (5,000) complement the low-wage retailing and restaurant work that led the early stages of the recovery. Also encouraging was the drop of 76,000 in the number of people working part-time because they can't find full-time work.

This week's real news was Thursday's productivity report, also from the Labor Department, which showed productivity rising at a 2% annual rate and hourly compensation having risen 1.4% after inflation in the last year, about double the post-recession average.

Productivity and wages both took a hit during last year's frigid winter. But after three years running under 1% annually, productivity growth popped to about 3.5% late last year, and began recovering from its own winter vortex by April. The winter increasingly looks like a fluke.

Better productivity is what can pave the way for better wages. The other thing that matters is that the list of cities and industries that are at full employment, and seeing more wage pressure, is getting longer, Naroff said.

Unemployment is below 5% in more than a third of the nation's cities, and under 5.2% in half the states. Wages are beginning to follow.

Better productivity can also hold interest rates near their historic lows for longer. The key to keeping inflation hawks calm when America begins to get better raises is to have unit labor costs stay stable -- as they have been. 

None of this has much to do with the electoral cycle, or with anything Republicans may do when they take full control of Congress in January. As Moody's Analytics chief economist Mark Zandi said Wednesday, real wages peaked when Bill Clinton was president, and their long-run stagnation began in the 1970s. And it all depends on private investment decisions businesses make, which defy politicians and their schemes.

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