WEST CHESTER, PA (TheStreet) -- Despite a positive December employment report, the job market still has a problem.
The December employment report was terrific, save for the wage and labor force details. With measures of labor market slack improving, the lack of wage growth could turn heads at the Federal Reserve, as it suggests the job market still has a cyclical problem.
The biggest disappointment is the 0.2% decline in average hourly earnings for private workers, and the revisions were unkind; November's gain was revised down from 0.4% to 0.2%. The U.S. labor income proxy for private workers, the product of earnings and hours worked, was unchanged in December following November's 0.8% and was well shy of its average gain of 0.4% in 2014.
Perhaps ironically, weak wage growth isn't a horrible thing now. Low wage growth is both a result of and evidence of labor market slack. Fast wage growth now would suggest the labor market was in fact tight, which would in turn imply the millions of workers who are underemployed or out of the labor force are unlikely to return to the labor market and that more of the problems thought to be cyclical are actually structural. Therefore, slow wage growth suggests that cyclical labor slack remains and monetary policy can play a role.
While both fast wage growth and declining labor market slack are desirable, the order in which they occur is important. If the fast wage growth shows up before labor slack starts falling, the Fed is likely to conclude that labor markets are tight and raise interest rates. Even if fast wage growth would eventually lure workers back into the labor force, it's unclear whether the Fed would be patient enough to wait and see. As a result, the best-case scenario for the economy is that wider labor slack declines first, and then fast wage growth comes.
Stronger wage growth should also boost labor force participation. Since the mid-1960s, changes in labor income have had a strong relationship with labor force growth. This also makes sense in theory: Workers normally have a sense of the minimum they will accept-also known as a reservation wage-to take a job. That reservation wage can be affected by a variety of factors, such as family and home ownership status, available jobless benefits or household wealth.
The Moody's Analytics forecast calls for wages to grow faster soon. Measures of labor market utilization are improving: The unemployment rate has been below 6% for four months, the U-6 measure of unemployment has fallen 1.9 percentage points over the past year, and the number of people working part time for economic reasons is trending lower. Moreover, the rate at which workers are voluntarily leaving jobs rose in 2014. A tight relationship exists between the quits rate and growth in the employment cost index for wages.
Read Ryan on Moody's Analytics Dismal Scientist.