Rising wages is one of the signals the Federal Reserve will be looking for before raising interest rates and generally means a healthier economy. It also means a healthier jobs economy: When workers have more choices of where to work, employers must take measures to keep the employees they want, like raising pay.
However, the pay gains don't suggest a serious shortage of workers in retail or leisure and hospitality, as some might think, and there is good reason to believe one will not develop anytime soon because of a shadow supply of labor that could hit the job market as wages continue to increase.
The job markets for retail and leisure and hospitality are tightening. Retail employment was at an all-time high in the first quarter, reaching 15.6 million jobs, or slightly above its pre-recession peak. Leisure and hospitality is doing even better, with employment now at 15 million, compared with a pre-recession peak of 13.5 million.
Job openings in both sectors are also back to pre-recession levels but hiring rates are relatively low, particularly for leisure and hospitality. This suggests that businesses are having a hard time filling their open positions, evidence that the job market is tightening.
But No Shortages
A tight job market doesn't imply a shortage. This is clear in wages, which aren't growing fast enough to suggest a shortage. In leisure and hospitality, average hourly earnings in February were up 3.3% from a year earlier, which is consistent with a tightening labor market.
Retail wage growth is even more modest, with wages up 2.8% from a year ago. Some retail categories are posting stronger wage growth than others. For example, clothing stores are up 3.2%, and general merchandise stores are up 4%. However, these are all short of or within the 3.5%-to-5% range that would be consistent with full employment. This suggests there is still room for faster wage growth without a shortage developing.
While wage growth isn't strong enough to suggest a shortage, it is enough to explain the minimum wage raises by some big businesses. For example, Wal-Mart's minimum wage hike will raise average full-time earnings by 1.1% and average part-time earnings by 5.5%, which is comparable to the 3.3% increases being seen in general merchandise stores.
The raise at McDonald's will be around 9.9%, above the 3.3% being seen in that sector. However, the increase is not taking place until June, by which time market wage growth is likely to be higher, and the base hourly rate will probably be larger, making the raise something less than 9.9%. In other words, these raises are within the order of magnitude of those seen in the wider improving economy.
A Shadow Supply of Labor
It is natural to wonder whether a labor shortage could develop. If this happens, wage growth in retail and leisure and hospitality could be accelerating very rapidly and potentially catching Federal Reserve officials' attention as they prepare to raise interest rates later this year. However, in these low-skilled sectors, a potentially large supply of young workers who are not currently in the labor force could limit future wage growth.
Teenagers have been working less for decades. From 1980 to 2014, the share of high school-age teens with jobs fell by half. This leaves many currently out of the job market who are potential workers. The employment-to-population rate for 16- and 17-year-olds was 17% in March. If that returned to levels seen a decade before, it would be 24%, implying 600,000 more workers. If the employment-to-population rate rose to levels from the late 1990s, it would be 1.3 million workers added to the labor market.
This wouldn't be unprecedented. The employment-to-population ratio for teens rose by 7 percentage points when unemployment fell during the 1980s, and rose by 4 percentage points during the mid-1990s economic boom. What's more, this trend is somewhat under way, with the employment-to-population ratio up 4 percentage points from the post-recession low. Given that teenagers tend to work in leisure/hospitality and retail, this supply of labor could prevent wages in these sectors from growing much faster and suggests a labor shortage is less likely.
Overall, wage growth is improving in retail and leisure and hospitality, but there is no sign yet of serious shortages. In addition, teenagers represent a large supply of potential labor market entrants that could keep a lid on wage growth and prevent a serious shortages from emerging.