Yesterday,
we discussed the lack
of wage inflation and all the slack in the Labor market. To really
understand how little "[wage] inflation and wage growth" there is, we need to go to the
charts.
These
will help explain why the Street has been so wrong on wage inflation; (I have no
answer as to why they have been so wrong on every other type of
inflation).
NOTE:
I took some of the terrifically instructive charts from a recent commentary by
Northern Trust’s Paul Kasriel, and then annotated them. Italicized comments
are his also. While credit for creating these graphs goes
to Paul, don’t blame him for mucking them up – that’s my handiwork.
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All Employees: Total Nonfarm
% Change – Year to Year (NSA, Thousands)
"Year-over-year nonfarm payroll growth appears to be peaking out
around 1.6% — lower than any other cyclical peak in the past 45 years."
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As this chart shows, on a year-over year basis, average hourly earnings improvements have been lackluster, only recently rising off of half century lows:
Average Hourly Earnings: Total Private Industries
% Change – Year to Year (NSA, $/Hour)
"On a year-over year basis, average hourly earnings of nonsupervisory private sector workers increased 3.3% in January. This is well below the peaks of over 4% in the prior two expansions."
>
Since 2000, overall total employment compensation continues to trend lower:
Employment Cost Index
"The fact ECI growth is slowing at the same time that the unemployment rate is falling adds credence to the notion that the unemployment overstates the degree of “tightness” in the labor market."
12-Mo %Chg
Participation Rate & Unemployment Rate
"There has never been an expansion cycle in the past 45 years in which the participation rate (those actually in the labor force as a percent of those that could be in the labor force) trended lower save for the current one. Had the labor participation rate risen in a normal cyclical fashion, today’s unemployment rate would be considerably higher"
These charts make clear there that the labor market is anything but tight and that the headline numbers are misleading.
Source:
January Employment Report – The True Story is in the Details Not the Headlines
Paul Kasriel
Northern Trust, February 03, 2006
http://tinyurl.com/dukw8
Aren’t these charts an clear statement that the current measures of unemployment, participation and wage pressures inaccurate?
Simon: Probably, but not necessarily very much. With unemployment it is surely a matter of (overly strict) definition of the term, and quite likely a matter of methodology (sampling/modeling biases). Compare the U-6 rate, which is 8%+, and thus much closer to Central European levels. It is incidentally also closer in definition. It was 10%+ not too long ago.
But overall I believe the perceived disconnect is not exclusively that unemployment is higher than reported, but that in the aggregate employment is no longer as strong a proxy for a good living standard as it used to be. (I.e. quality of jobs, and (actual) inflation.)
But what are the reasons for lower participation, aside from the discouraged worker effect (which includes stay-home spouses and escaping to education)?
A possibly “saturated” job market would still qualify under the same heading for me. But then we should see a higher U-6 unemployment rate, unless “self-unemployment” sucks up a lot of the slack, or the biases in unemployment estimates are more serious than I think.
THE TAX CUTS ARE WORKING
. . . unless you care about jobs. PGL at Angry Bear Barry Ritholtz at The Big Picture Menzie Chin at Econobrowser (here too) Labor market genius Jared Bernstein (Mama MaxSpeak: “How come that Jared Bernstein person always gets quoted…
Barry said, “To really understand how little inflation and wage growth there is, we need to go to the charts”
So, are you conceding the point that consumer inflation is not a problem/issue right now?
BR: Bad grammar on my part: I was referring to “wage inflation and wage growth” — As the rest of the inflation writings make clear, I (obviously) feel there is significant inflation . . .
You’ve annotated the ECI chart with “Falling Salaries and Benefits” but it appears to me that the chart actually illustrates salaries and benefits growing at a 3% clip (albeit down from a 4.5% rate six years ago when things were just nuts).
Although it’s hard to tell exactly since the Y-Axis isn’t labeled.
BR: Its the 12-Month %Change — I’ll fix it
It might be of interest to see which groups are and are not participating in the recent labor market.
DJ – I think Barry’s point is that wages are flat to down, and unemployment is understated. Then, on top of that, we have declines in dollar value reducing the value of the consumer’s dollar at the same time we have all kinds of pressure on the consumer in the form of higher energy and housing costs. If you look at MEW numbers, it is clear that the economy only grew last year on the back of the consumer taking on debt or extracting equity from their houses. So prices are rising and the consumer is making purchases not based on rising wages but on equity extraction. Hence, inflation is still a problem. If we look at common purchases, while food prices are rising, many goods and services are not rising because the sellers are sacrificing margins for sales (or by beating up their suppliers). This is Walmart’s problem.
Damian, higher energy prices are a significant issue and are the main reason why CPI was up 3.4%. However, housing is an asset not a consumable. Rent is a consumable and has not had excessive price increases. You and Barry are confusing asset inflation for consumer inflation.
Otherwise, I agree with you that wages are down, margins would be getting squeezed except for record productivity, and the consumer is getting by on equity extraction – but not because of consumer inflation.
DJ,
Regardless of the definition. Consumers consume housing and ignoring the tremendous asset inflation of housing is just wrong.
It seems like the peaks in labor cost growth follow a pretty clear downward trend since about 1985 (IOW you could draw a straight line connecting the peaks which would angle down and to the right). Could it be that this is a long running phenomenon that is just now getting pronounced enough to be on the radar with this “recovery”? If labor pricing power gets progressively weaker at every downturn at some point will we have labor deflation in nominal as well as real dollars?
DJ – I wouldn’t disagree with your assessment of the difference between rent and owning a house except that we know that CPI is artificially held down by because of the way it takes housing into account.
Rents are/were at an all time low as people upped their purchases of houses. Prices on houses, however, were going like a bat out of hell. If CPI took mortgage servicing costs into account rather than a calculated rental rate based on the area the house is in, they would have a very different picture with CPI and you would see a lot more consumer inflation.
And I forgot to mention healthcare and education costs which are both rising much much faster than the rate of inflation.
Are you arguing that we’re not in a strongly inflationary period? Or is your argument just that inflation is tame but wages are not growing?
Damian, mortgage servicing doesn’t belong in the CPI because it is a loan on an asset. Rent was at all-time lows because we are not in a consumer inflationary period. I am open to the idea that CPI is understated & certainly healthcare & education are understated. But however you want to define consumer inflation, in 2005 it was driven by fuel increases that largely didn’t get passed into other products. If fuel stays level, for 2006 I am taking the under for 2006 vs 2005 consumer inflation. So to answer your question, we are not in a strongly consumer inflationary period, consumer inflation is tame, asset inflation is running rampant, and wages are not growing. When housing really slows down we will be much more worried about consumer deflation.
Dru Nelson, nobody is ignoring anything. On a website of this caliber it is appropriate that our definitions are correct.
THE TAX CUTS ARE WORKING
. . . unless you care about jobs. PGL at Angry Bear Barry Ritholtz at The Big Picture Menzie Chin at Econobrowser (here too) Labor market genius Jared Bernstein (Mama MaxSpeak: “How come that Jared Bernstein person always gets quoted…
I think you can define inflation in many ways, but I would say a first time home buyer definitely would feel that the inflated prices of homes at all levels has an inflationary effect on their ability to purchase a basket of goods &/or home.
DJ – you are technically right, but in an era of interest-only mortgages, I have trouble counting it as an asset. Asset inflation leads to consumer inflation because they have to pay the mortgage on a monthly basis. The consumer then takes money out of their houses – so if it is an asset, it is a heavily leveraged one.
Your comment that rents are at an all-time low because we are not in a consumer inflationary period misses the point. Rents are low because of the huge housing asset bubble. Because CPI uses rent as the measure of the cost of housing, it naturally understates inflation. As the housing bubble bursts, we will see rents rise – and then the inflation that has been “hidden” so far will become readily apparent.
For another reference, take a look at this article:
http://www.dallasnews.com/sharedcontent/dws/bus/columnists/all/stories/DN-dimartino_06bus.ART.State.Edition2.90e9e07.html
“The closest proxy to home-price gains in the consumer price index would have you believe that home prices have risen 2.5 percent over the past year.
A separate government figure – from the Office of Federal Housing Enterprise Oversight – is considered much more realistic and puts annual housing price inflation in the past year around 12 percent.
Some of the distortion stems from how the government gathers its data for the CPI. The so-called “owners’ equivalent rent,” which constitutes a whopping 23 percent of the CPI, is derived from what landlords of single-family homes charge for rent. And rents have been stagnant.
If that figure were derived from the rental costs implicit in what you’re paying on your mortgage, it probably would come in closer to the OFHEO’s 12 percent figure in recent years.
And therein lies the upside risk to the CPI – in its overemphasis on single-family home rents.”
A home is an asset and a home financed by an interest only mortgage is a highly leveraged asset. Asset inflation does not necessarily lead to consumer inflation. There has been too little study on this matter but I believe that in an era of excessive wealth consolidation the flipside to asset inflation is consumer deflation. It is consumer deflation that is hidden until the asset inflation bursts. It is the 1920s-1930s economy all over again.
Finally, I disagree that rents will increase when the housing bubble bursts. Time will tell.
You case is flawed: you could use these same charts to make the opposite argument. Consecutive higher lows in the hiring troughs, and lower peaks in the unemployment rate.
In the early 1960s we see labour participate start a
long steady 40 year rise. By start of the 21st century
it starts would I predict will be a long steady drop.
What happened in the early 1960s? The
first of the post WWII baby boom generation reached
adulthood (or least became of age to start working).
What happened at the turn of the century? The
first baby boomers started to retire, no doubt
accelerated by the dot com bubble (those who
cashed out in the black) and the dot com
bust (those who took a big severance package).
The labour participation rate is going to get really
ugly unless there are advances in geriatric
medicine and advances in the attitudes of
employers that prefer to hire young studs.
Hint: the baby boomers had a lot fewer kids
per capita than their parents.
Jobless vs. Unemployed
In today’s NYT, Floyd Norris hits on a subject that has been a favorite of ours over the years: Finding the true measure of the economy’s labor situation.The unemployment rate is low. The jobless rate is high.Those two seemingly contradictory statement…