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Why Wages Aren't Growing Faster

Robert Johnson, CFA
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Bob Johnson, he's our director of economic analysis. We're going to look at why hourly wage growth hasn't been growing.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So it's the week after the jobs report, and one of the mysteries has been that even as employment has grown and the unemployment rate has gone down, we haven't really seen wage growth budge all that much. Why do you think that this number isn't growing any faster?

Johnson: Absolutely, and to put it into some context, we've been growing at about 2.5% recently in terms of wage growth. It's been as high, we had few months back earlier in the year when we were more like 2.8 or 2.9%. But subsequently we're back down to this 2.5% level, and that's the level we've been at for the last couple of years.

And that's just on a nominal basis. That's been a disappointing number. It's probably even more disappointing when you adjust for inflation, because when we had some of those really big wage numbers, we also had some very low inflation in some of the those months. So the inflation-adjusted wage was actually pretty close to 2%, now it's back down again.

Glaser: How much of this is due to a changing workforce? Is the change in demographics the biggest driver here?

Johnson: There are a lot of them, and let's be honest, we've been forecasting and talking about this labor shortage for a very long time, and thought it would generate very hefty wage growth. We would have guessed by now, we would have been up over 3% with a chance at 3.5% within the next couple years on the headline wage growth number.

And it hasn't come to pass. Now in retrospect, trying to explain it away a bit, if you will, in all honesty, what we've seen is a number of issues. And I think demographics was what we thought would be part of the problem, but it also explains part of what's happening right now.

We've got a lot of baby boomers retiring at a relatively high wage, and they're being replaced with younger workers that are paid a lower wage. And they're also less productive, and you're seeing that in some of the statistics too. But you've got this situation where you're replacing older people that are making a higher wage on average, and filling it with younger people, or maybe even a couple of younger people at a lower wage. And that's one of the things that's depressing the number. And it's a phenomena that if you look at the average age of the workforce, it's begun to move down again. And so it's clearly a factor in what's happening out here.

Glaser: When you look at sectors that have been adding jobs, has that been a big contributor, as well?

Johnson: It has, and I think that in some ways you look at the mix overall, and we thought that would be all of the explanation, but when we did the detailed analysis following last Friday, we looked at the numbers every way we could, and you know the mix really didn't make all of that big a difference between broad industry categories.

There were a lot of little positives in there. I mean the leisure and hospitality hourly wage is up 4%. I mentioned it's 2.5% on average. So clearly the minimum wage has begun to do some of its work, and certainly given that demographic that works in that industry, most of that money gets spent, and so we've shifted some of the wage flow to people that are more likely to spend it.

That's certainly been helpful that those wages have been up some. So that was some of the good news in there by sector. But the mix issues really didn't do much.

Glaser: How about healthcare? That's been a big driver and we think of that as a higher paying sector. Why is that not contributing to higher wage growth?

Johnson: So I mentioned by the big sectors, that we haven't really seen the mix net do much for us, but with individual categories, it's been a pretty big deal. And one of the problems in healthcare is that it's one of our fastest growing and one of our largest categories of employers. But if you think about it, the number of doctors, lawyers, the people at the top end of the pyramid, aren't growing very fast. They can't because of the limits on the medical schools and how many students graduate out of those every year. So that isn't growing very fast.

A lot of the bodies has been added in the support and maybe even the base care, if you will, where it's a very low wage job. Despite the fact that healthcare's been this rapidly growing sector--and I mentioned total wage growth is up over 2.5%--the healthcare-only number is only about 2%, and the reason is this mix situation that's happening in healthcare.

Glaser: Finally, you mention that leisure and hospitality is seeing some nice growth possibly because of the minimum wage, but we're not seeing that in the retail space.

Johnson: Yeah. Certainly one of the other sectoral issues that's out there, that's held and pulled the number down recently, is retail. And retail wages have only been going up about 1 to 1.5% recently. So way below that 2.5% number. And that's a pretty large sector. Retail's 13, 14, 15 million out of the 125 million, or so, private sector workers. So it's a big sector. It's about 13% and that sector is only growing a little over 1% at this very moment. So that's certainly another thing that's holding it back.

And retail is struggling a little bit right now with how they think about their businesses, and we've also seen some months they've cut back in hours, some months they've cut back in wages, and some months they've cut back in employment levels. So they've been playing with all the different levers here and there. So I don't want to say that 1.1% is totally representative, but it's a pretty disappointing number. And there isn't a good basis to think it's going to get a lot better soon. So that's another thing that's holding the number back, and they're aren't a lot of high paying jobs that have come into replace those.

Glaser: What's your outlook then, for wage growth? Will any of these trends begin to reverse themselves or are we stuck in this 2.5% range?

Johnson: Well, I hate to give up just yet. The shortages are really quite real in a number of industries, and the American public is actually usually very good at discerning where the opportunities are and retrain themselves and shift to where things are working out a little better. I think that, that may happen. And I think we may at least close some of that gap where there are high-paying jobs aren't filled. I think people will eventually train and fill in for those jobs.

So I'm hopeful on that front, and I am hopeful that--even some of the minimum wage jobs, that some of the shortages will continue to get worse, over say about the next five years, we get the baby boomer retirement, not many inbound people where we're going to have this constricting of the U.S. labor force. So I think we've got some issues even on the low end where we could see some more lift.

And even there, we had mentioned in our review last Friday, that we've seen that minimum wage increases, a lot of them happen July 1. So that will kind of show up in the next month, or the months after data.

Glaser: Bob, thanks for this look at our wage data today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser, thanks for watching.