By: Dividend Sensei
We can see that by looking at the most accurate unemployment rate U6 which measures both those looking for work but also people who want work (but haven’t looked in a 4+ weeks) or are working part time but want to work full time. That rate is 7.8% and has been declining at about three times the rate of U3. Think of U6 as the “real unemployment rate”. The lowest U6 ever dropped in modern times was October 2000 when it hit 6.8%. This means that we’re likely to see stronger wage growth as the labor market continues tightening and U6 keeps falling.
But here’s two pieces of good news. First wage growth might not be that strong nationwide, but in certain areas it is. For example using slightly different research methodology the Bureau of Economic Analysis calculated the wage growth in each state in 2017. Nationwide the BEA estimates that wage growth hit 3.1% but in certain regions that was much higher. In fact in the southeast and west wage growth is indeed booming at the levels last seen in the 90’s.
But what if you don’t live in Washington state or the boomtown of Boise Idaho? When can you expect to see strong wage growth? That’s where we see the best news of all.
While wage growth doesn’t appear to be tracking with U3 unemployment (labor market appears “broken”) if we plot wage growth against prime age non-employment (100% minus prime labor force) we can see that indeed the biggest reason for slow wage growth is simply supply and demand.
Or to put another way, “this time isn’t different” and we can expect stronger wage growth in all regions as long as net job creation continues to outpace population growth (over 75,000 per month in the government report).
As you can see the prime age participation rate has started rising, but that’s a new trend. It didn’t bottom until September 2015, 29 months ago. This means that the prime age participation rate has been rising by about 0.05% per month or about 0.6% per year. This means that we can expect to see the labor market get back to pre-recession levels (including wage growth wise of about 3.5% to 4% nationwide) within about 21 months or so (about two years). If the economy avoids a recession for just over four years (about 53 months) then the prime age participation rate will likely be back to the all time highs of the late 90’s. That was when wage growth of 5% was common.
The bottom line is that wage growth is lower than we like because the state of the labor market isn’t nearly as strong as the headline unemployment numbersmakes it first appear. But the good news is that with each passing month of modest to strong net job creation we get one step closer to stronger wage growth that can help boost Main Street’s prosperity and also drive stronger and more sustained economic growth in the coming years.