Wage (and price) update

May 11th, 2016 at 1:56 pm

Though last Friday’s jobs report came in a bit under expectations, many analysts, myself included, noted that (nominal) wage growth has picked up in recent months. That is both expected and precisely as it should be. As the job market tightens, employers should have to bid wage offers up more to get and keep the workers they need.

However, given the weakness in the bargaining power of so many in the workforce, along with some anxiety about price pressures from wage-push inflation, such evidence must be scrutinized. How fast are wages growing? Which wages or compensation series are we talking about? Does wage growth threaten inflationary pressures? Once you adjust for inflation, are workers getting ahead? If so, which workers? The average? The median? Low-wage earners? (Another good question, which I won’t get into, asks about regional variation in wage growth; outside of states hit by the fall in energy prices, moodys.com reports that wages have picked up in most parts of the country.)

In terms of wage trends across the distribution, a strong theme of my own work, often with economist Dean Baker, is that as the unemployment rate falls, the tightening job market disproportionately helps lower-wage and minority workers. I’ve got some new data on that important relationship, too, and I also will use this opportunity to correct a mistake from some of our earlier research in this area.

First, as there are many different wage series, a good way to evaluate evolving wage pressures is to mash them together using principal components analysis (a statistical technique that gives heavier weight to the series with the strongest signal). The figure uses five different series of wages and compensation to make some revealing points (see data note below for details).

Source: BLS, my analysis.

Source: BLS, my analysis.

Wage growth has mildly and “choppingly” accelerated in recent quarters. The mashup shows that a few years ago, wages were rising at a rate below 2%; now they’re growing a bit above 2%. But that pace is well below historical growth rates, going back to the 1980s, and the increase is extremely gradual compared to, say, the 1990s, when the job market eventually became a lot tighter than it is today.

For a variety of reasons, I do not consider this pace of wage growth to be inflationary:

–Chair Yellen has maintained that wage growth consistent with stable inflation is 3-3.5%, at least a point faster than the current rate (btw, why 3-3.5%? Because it equals trend productivity growth (~1%) + the Fed’s inflation target (2%)).

–Research has found little evidence of wage growth bleeding into price growth in recent years. For example, wage growth has been found to be of limited use in predicting inflation. The figure below shows the evolving coefficient on wage growth in a regression with prices as the dependent variable (see data note). It shows decreasing wage pass-through to prices and declining significance (the standard error widens and crosses zero for the most recent observations).

Source: see data note

Source: see data note

–As the job market has tightened, the bloated profit share of national income has been coming down a bit relative to labor’s share. This too is a source of non-inflationary wage growth.

–It’s reasonable to worry that rising wage growth amidst slow productivity could create price pressures (though the previous bullet describes a pressure value for that scenario). The variable you want to look to evaluate that possibility is the growth in unit labor costs, which tells you how fast compensation is growing relative to productivity. Since 2015, ULCs are growing at an average rate of 2.1%. That’s an acceleration over their 1.6% pace over the prior two years, but nothing much yet to see their folks…move along, please.

Turning to real wages, paychecks have definitely been growing in real terms, as the tick up in wage growth you see in the mashup has coincided with lower energy costs seriously pushing down inflation. This observation regarding the roles of depressed prices in real wage gains is important, because as price growth normalizes, wages will need to accelerate to grow in real terms. The mashup, the median, and the 25th percentile (lower-wage earnings) have all been growing by about 2% in real terms over the past year. Economist Elise Gould takes a more granular look at recent real wage growth and finds larger gains at the top of the distribution and, in states that raised their minimum wages, at the bottom as well.

History tells us that if tight job markets persist, larger benefits will accrue to lower- and middle-wage workers. Basically, when the economy sniffles, low-wage workers catch pneumonia. The reasoning is simple: the lowest-paid workers have the least bargaining clout, so they depend most on the tight job market to generate competition for their services.

Economists have shown evidence of this relationship both here and in the UK. My own work has often featured the impact of lower unemployment on low-, middle-, and high-wage workers. The table below contains the coefficients on unemployment for three different panel wage regressions, of 50 states (plus DC) over 36 years, so 1,836 observations (controlling for “fixed effects”). The results imply that a 50% fall in unemployment, say from 10% to 5%, would raise low wages by about 5%, middle-wages by about 2%, and high wages, not at all.

Source: See data note

Source: See data note

[Important note: this corrects earlier figures from these same regressions where we reported much larger elasticities. The key figure has been corrected in the online version of my book, The Reconnection Agenda, Chapter 3, Figure 2.]

So, wages are rising in nominal terms throughout the pay scale, and low inflation means most of these gains are real. Any feedback into prices is dampened by the low level of wage growth, rebalancing of factor shares, and a relatively low correlation that has developed over time re the price-wage relationship. If we can get to and stay at full employment, history shows that the benefits in terms of wage growth will accrue most to those with the least bargaining power. If that doesn’t happen, the extent to which wage inequality remains embedded in our economy and labor market means that these recent gains are likely be short-lived.

Data note:

Wage mashup: This series is derived from a principal components analysis of annual changes in five series: ECI, wage and compensation, median earnings, production worker wages, and compensation from the productivity report.

The second figure shows the changing coefficient from a Kalman Filter analysis of CPI prices on the wage mashup (quarterly changes, annualized), controlling for energy prices and the value of the dollar in a broad, trade-weighted index. The “smoothed state” of the mashup variable and its standard errors is shown in the figure.

The table of coefficients is from panel regressions of log hourly wages on logged unemployment lagged one year. Data run from 1979-2015. I thank the Economic Policy Institute for the wage data.

How the Puerto Rican debt crisis could become a bailout

May 10th, 2016 at 9:04 am

Meaning a cost shift from creditors to taxpayers. Obviously, the gov’t of the island borrowed far beyond their means–see the John Oliver link for great and even entertaining detail on the evolution of the crisis. And thus an oversight board is a reasonable quid pro quo for restructuring. But if not for the legal quirk that the commonwealth has no path to bankruptcy, we wouldn’t even be arguing about this.

Over at WaPo.

The overuse of “non-compete agreements” and what to do about them

May 9th, 2016 at 8:35 am

One reason we don’t see nearly enough wage growth in the US labor market is that employers rarely have to compete for workers. Often this is due to weak demand (persistent labor market slack), but discrimination by race and gender and low unionization rates can also play a role in reduced worker bargaining power.

A new report from the White House suggests another, quite direct form of this problem: “non-compete agreements” (NCAs), “contracts that ban workers at a certain company from going to work for a competing employer within a certain period of time after leaving a job.”

The rationale for such agreements is the protection of “trade secrets.” Without them, companies argue, employees could learn proprietary information and then market it to rival companies in return for a better employment offer.  Relatedly, companies worry that they will invest time and money into employee training only to miss out on the rewards of that investment (while their competitors gain) when freshly trained employees jump ship.

Such concerns have merit, but surely not for every type of worker. The report tells, for example, of a national sandwich chain that “required its employees to sign an expansive non-compete agreement that would ban them from working at just about any other fast-food restaurant.” Yes, some of these shops tout their “secret sauce,” but this practice reeks of suppressed competition and pay.

In fact, the White House finds that 15 percent of non-college graduates are subject to NCAs, as are 14 percent of workers earning less than $40,000 (according to my analysis, 14 percent of jobs under that pay level amounts to about 12 million workers). Add that information to the fact that most workers with NCAs claim not to possess trade secrets and one gets a sense of the problem.

Unnecessary bans on labor mobility are bad for workers and bad for the broader economy, as efficient matching between workers and jobs requires freedom of movement. But is there any evidence that NCAs actually dampen worker bargaining power/negotiating leverage? In fact, the research finds that a one-standard-deviation increase in NCA enforcement is accompanied by a 1.4 percent reduction in wages. This is an especially notable finding if you consider the claim that NCAs incentivize worker training, as that would lead you to expect higher pay where NCAs are more prevalent.

The good news is that some states are taking action against NCAs. Oregon doesn’t allow non-competes for workers who make less than the median family income, for example, and New Hampshire and Oregon both require employers to notify job applicants about NCAs before those prospective employees have officially taken a position. That’s important because more than a third of workers are asked to sign non-competes after a job offer.  Courts in Montana and New York have voided NCAs when employees are terminated without cause and several states, including Colorado, Delaware, and Texas, have restrictions on the use of NCAs in health care occupations. California, where Silicon Valley was known for generating NCAs, has rendered most of them unenforceable altogether. Yet 22 percent of California workers there have still reported that they’ve signed NCAs, so there’s more work to be done here.

These state actions all look useful to varying degrees, but a simple piece of federal action could go a long way here. Since low-wage workers should not have to—cannot afford to—sacrifice their ability to pursue higher pay, and since such workers are least likely to possess trade secrets, the federal government should consider a ban on NCAs below some salary or wage level. For example, while any level would be arbitrary, the bottom third of salaries, up to $22,000 today, might be a reasonable cutoff.

While non-competes may make sense in some instances, common sense would dictate that a) most workers do not possess trade secrets of any value, and b) there are better, less coercive ways for firms to retain their workforce. Employees who “feel involved in, enthusiastic about and committed to their work” are much less likely to leave their companies even when offered raises as high as 20 percent, and those who “exhibit high well-being” are “59% less likely to look for a job with a different organization in the next 12 months.”

As regards worker training, economists have long recognized that there’s a potential market failure here. Firms that fear the sunk costs of training will be unrecoverable if workers leave shortly after getting trained will tend to do too little of it. If enough firms think that way, a suboptimal amount of training will be on offer. The classic solution is to make worker training a “public good,” and, in fact, we see some of that occurring with publicly supported community college training initiatives tied to in-demand jobs.

Competition is the hallmark of capitalism, and the bar for restricting it, especially among lower-paid workers who stand to benefit most from competition for their services, should be very high indeed. From that perspective, taking action against NCAs is low-hanging fruit.

Puerto Rico by John Oliver

May 6th, 2016 at 1:32 pm

Early next week, I’ll have a piece out on the ongoing debt crisis in Puerto Rico which strongly urges Congress to act before restructuring morphs into bailout. But in the meantime, here’s everything you need to know about this issue from the absolutely brilliant John Oliver. If only I could be 1/10th this entertaining when I talk about this stuff. The guy makes explaining bond yields fun! (Trigger warning: some curses ensue, deservedly so.)

It has to take tremendous prep to pull this off, which means that while Oliver is superb, he must also have a killer staff. I’ve seen most of his pieces on policies with which I’m familiar, and I don’t recall them getting any facts wrong.