Strong Jobs Data Usually Means High Wages, But Not This Time

Friday’s September jobs report shows that the country’s labor market had another strong month. Total nonfarm employment increased by 156,000 jobs, and the unemployment rate remained low at 4.4 percent. Some of the biggest jobs gains occurred in manufacturing, construction and health care.

This is certainly good news, but we may not see a corresponding bump in wage growth until we tackle our productivity problem.

The total number of new jobs created last month was less than August of 2016, but this is not as bad as it sounds, since the difference is entirely due to a decline in government jobs. The number of private sector job created last month was 22,000 higher than a year ago. 

The overall labor force participation rate held steady at 62.9 percent. Unfortunately, the prime-age (ages 25–54) labor force participation rate fell slightly for both males and females. Overall, it’s still about two percentage points lower than the pre-recession peak.

Additionally, the broadest measure of unemployment, which includes both discouraged workers and those working part-time who want a full-time job, was 8.6 percent. This is down from a year ago but remains slightly higher than prior to the recession.

That said, the low headline unemployment rate and historically small number of people receiving unemployment benefits still point to a tight labor market that should keep wages trending up.

Nominal average wages — i.e., not adjusted for inflation — grew by 2.5 percent from August 2016 to August 2017, which is good but not great. In the past, wages have typically grown faster, between 3.5 and 4 percent, when the economy is at full strength.

However, a tight labor market is not the only determinant of wage growth. While it does encourage firms to increase wages to attract qualified workers, increases in labor productivity are the primary driver of wage growth and living standards, and right now productivity growth is low.

In fact, once the low rate of productivity growth and the low inflation rate are taken into account, nominal wage growth is about what we would expect.

So what can be done to increase productivity? Tax reform, specifically lowering the corporate income tax, is one option. Reducing the corporate income tax would encourage capital investment that makes workers more productive and increases wages. 

Additionally, where a tax is levied doesn’t always coincide with who bears the tax’s burden. Research shows that workers bear anywhere from 35 percent to 60 percent of the corporate income tax in the form of lower wages, so lowering it would increase wages by relieving workers of their share of the burden.

Both Democrats and Republicans have called for lowering the corporate income tax, along with tax reform more broadly, for what seems like decades. Yet America’s convoluted and uncompetitive tax code remains and productivity growth, unsurprisingly, remains low. 

There is also evidence that less federal regulation would boost worker productivity and GDP growth. The Trump administration has promised to reduce redundant regulations and some progress has been made, but much more is needed.

State and local governments aren’t helping either. At the state level, occupational licensing reform would make it easier for people to get jobs in higher paying industries. States also need to examine their own regulatory environments and cut unnecessary regulation.

At the local level, strict land-use regulations are keeping people out of the most productive places where wages are higher. There is a huge misallocation of workers in America right now — too many workers in relatively low-productivity places like West Virginia and Scranton and too few in high-productivity places like Boston and Southern California.

According to one study, if more people moved to the most productive areas of the country, GDP per worker would be about $3,000 higher.

There are steps that governments at all levels can take to increase worker productivity. Until then, wage growth is likely to remain low despite the tight labor market.