Despite strong improvements in the unemployment rate, weekly jobless claims and quits, wage growth has been almost nonexistent so far in this 5½-year economic recovery. Still, recent data show coordinated improvement across multiple indicators, and the most recent wage numbers look promising.
Rising quits — employees quitting their jobs voluntarily — rose sharply in September, jumping 243,000, the highest level since early 2008. Since layoffs have not changed significantly, the ratio of quits to layoffs has resulted in marked improvement in separations.
Quits in September were 2.75 million, while layoffs were steady at 1.65 million. Employees don’t typically quit their jobs unless they either have another, better job lined up, or they are highly confident that they can find another job relatively quickly and easily. This is a strong sign of an improving jobs market and economy.
Initial jobless claims were at a 14-year low in September. If claims remain at current levels or improve, quits will account for a rising share of employment separations (quits + layoffs). Employers certainly track this ratio, and continued improvement in the components of the ratio — and the ratio itself — should drive employers to raise wages to attract quality hires.
To date the sore spot in the labor market has been stubborn wage growth. Wage growth has hovered around 2 percent since late 2009, despite the unemployment rate falling to 5.8 percent for the most recent reading from above 10 percent. One bright spot in the data is the average weekly wage growth for production and nonsupervisory workers, which has been above 2.5 percent for the past four months, and was 2.8 percent in October.
The problem in the data is that growth is coming in the blue-collar segment primarily, and not in the white-collar, higher wage-earning segment. To drive consumer spending, we need those with the most disposable income to experience wage growth, so they are more confident in the economy, and in turn, will go out and spend more. This is even more critical at this time of year, as we enter the holiday spending season.
In October, overall wage growth — including all workers, blue collar and white collar — was up 2.6 percent year-over-year. While this is not robust growth, it is an improvement.
Although the data have yet to establish a solid up-trend, wage growth did improve in October, and this could indicate the beginning of a stronger trend. It will take at least a few months before we will know if there is an improving trend, however. We are also entering the holidays — a period during which employers typically do not do as much hiring, preferring to push until the beginning of the year, when new budgets are established, and managers are back from vacations so they can focus on the interviewing and hiring process.
For financial markets, the pace of wage growth is critical, since the Fed pays very close attention to the employment landscape. Fed officials, including New York Fed president William Dudley, have stated recently that continued lackluster employment market performance, including the weakness in wage growth, indicates that the need for raising interest rates is not pressing. The longer the Fed can hold out before it raises rates, the more investors will feel that both stocks and bonds have further room for advancement.
Underemployment — those who have jobs that pay less than the worker should earn, given their skill set, educations, experience, etc., or those working part-time jobs who want full-time jobs — is another significant factor in the job market, and is specifically affecting wage growth.
Another way to view underemployed workers is to see them as still unemployed. Although they have a job and are making some money, they are typically unsatisfied with their jobs, and therefore are likely to seek better employment opportunities. Other unemployed workers must compete with the underemployed for jobs, which means employers can pay less to fill positions. As this slack is removed from the labor market, employers will be forced to pay more to get qualified employees, but clearly we are not at that point yet.
Underemployment is estimated to be as many as 22 million Americans (although the number is hard to accurately measure). We have been adding a bit more than 220,000 net jobs per month lately, so one can see how long it could take to work through the mass of people who still need to find a job that pays well, given their earnings potential.
The Thomson Reuters/University of Michigan’s consumer sentiment for November was 89.4, the highest reading since July 2007. The Conference Board’s Consumer Confidence Index, which had decreased in September, rebounded in October to 94.5 (1985=100), up from 89.0 in September. These data points should give retailers a high degree of confidence for the holiday sales season, and could help to push employers to hire more workers as they gain confidence in the economy.
As things unfold over the coming months, we need to watch for developing positive trends for improving wage growth, quits-to-layoffs ratio increases and overall jobs growth. From an investment perspective, such data will likely be what the Fed watches most closely as it formulates a strategy for raising interest rates.