February’s job growth was significantly stronger (+313,000 Establishment Survey) than market expectations (200,000). Strangely, though, the unemployment rate (U3) remained at 4.1% (Household Survey) for the fifth straight month. Why? Because a significant number of those who had previously stopped looking for work rejoined the labor force, perhaps indicating more labor force slack than the unemployment rate would indicate. The biggest disappointment, however, was the slowdown in the growth of wages.
In January, wages grew by $.07/hour, or at a 3.2% annualized rate. It appeared, then, that there may be a comeback for the discredited Phillips Curve, a Fed favorite. The Phillips Curve relies on historical data which shows a strong relationship between a low and falling unemployment rate and rising wage pressures. When that January data appeared, this blog commented that, because this series is significantly impacted by bad weather, we ought to wait a couple more months before concluding that wage inflation had reappeared. [Only those being paid on the survey date are counted, so lower (hourly) wage employees that were impacted by weather were not counted while salaried workers were (even if they didn’t come to work.)] Sure enough, February’s wage gains were much lower ($.04/hour or a 1.8% annual rate). Averaging the two months (2.5% annual rate) is likely closer to the truth. This doesn’t mean we won’t see future wage pressures, as businesses’ biggest complaint has been the lack of skilled labor. It just hasn’t happened yet.
Labor Market Slack?
February’s growth of 806,000 in the Household Survey’s labor force makes it abundantly clear that the U3 unemployment rate (4.1% for five months in a row), the rate that makes the news, is probably not a good indicator of labor market conditions. Since the profound changes in its definition in the 1990s (perhaps to make the politicians look better), the U3 unemployment rate cannot be compared to the headline unemployment rate of the 1950s to the 1990s (at that time there was only one unemployment rate!). The U6 unemployment rate, which counts discouraged workers and those working part-time but want full-time jobs, is a better indicator of labor force slack. In November, the U6 was 8.0%. It rose to 8.1% in December, then to 8.2% in January and February. Looking at U6 instead of U3 makes a strong case as to why wages haven’t been rising faster.
Disappearing Middle Class
Income inequality has become a large and growing issue in today’s increasingly high tech economy. In an article entitled “Why American Workers Aren’t Getting a Raise…,” Jonathan Tepper outline’s several symptoms of this phenomenon:
• Record high corporate profits/GDP (and record low employee compensation/GDP) are due to rising business concentration (bigger firms dominate). Tepper indicates that today there are 50% fewer publicly traded companies than 35 years ago, and fewer, but larger, companies by industry. (Five banks control 50% of the market, four airlines dominate air travel; four players control the entire U.S. beef market…);
• The discrepancy in pay between the average worker and the CEO was 33/1 in 1978; in 2015 it had risen to 276/1. In contrast, it is 22/1 in the UK, 15/1 in France, and 12/1 in Germany. [And now, for the first time, U.S. publicly traded companies are required to divulge this ratio. At this writing, 50 companies have done so, including Whirlpool (365/1), Kraft (91/1), Cincinnati Financial (54/1)…];
• Tepper says that there used to be a countervailing force – unions. While controversy surrounds them, the decline in the strength of labor unions and the stagnation of middle class pay are highly correlated.
Still, while Tepper’s data are quite convincing in showing the move toward income inequality over the past half century, except for the labor union discussion, he has little to say about causation. My own belief, based purely on 35 years of being a serial entrepreneur, is that the move toward business concentration and thus corporate power is mainly due to the rise of intrusive government (federal, state, local) along with ever increasing litigiousness. Today’s small business owner must cope with HR and legal issues only a big firm can afford to tackle (sexual harassment, retaliation, failure to promote, Obamacare, not to mention licenses, reports, examinations, taxes etc).
It takes years for local developers to get entitlements. Ten years after the passage of the Interstate Highway legislation (1956), there were 20,000 miles of Interstate Highways. Today, it takes 10-25 years to accomplish even a single mile. As an example, the Oakland side of the Bay Bridge was impacted by the Earthquake of October, 1989; the new span was completed in 2014!
No doubt, all the rules, regulations, reports, taxes etc. were well intentioned, structured mainly to protect the small and weak from the big and strong. But, after 50 years of ever increasing government intrusion, it is now clear that those who the regulations were intended to protect are significantly worse off. Small business today is so disadvantaged that, per Tepper’s observations, there are fewer and fewer of them.
Conclusion: Government intrusion into our lives often accomplishes just the opposite of what was intended.
Robert Barone, Ph.D.
Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Fieldstone Financial. www.FieldstoneFinancial.com .
He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (a AAA company) where he chairs the Finance and Investment Committee. Robert leads the investment governance program at Fieldstone Financial, is the head of Fieldstone Research www.FieldstoneResearch.com, and is co-portfolio manager of the Fieldstone UVA Unconstrained Medium-Term Fixed Income ETF (FFIU).
Statistics and other information have been compiled from various sources. The facts and information are believed to be accurate and credible, but there is no guarantee as to the complete accuracy of this information.