US spare capacity vs Wages
Sources: Federal Reserve Bank of St. Louis.
The US’s labour market has dramatically improved since the Global Financial Crisis. The unemployment rate has fallen from a peak of 10% in 2009 to currently stand at 4%.
Remarkably US unemployment is now 0.5% below what the US central bank considers to be the long run normal rate of unemployment at 4.5%. Essentially this current -0.5 % spare capacity gap (red line) suggests that the US labour market has run out of available workers to fill job vacancies.
There is some evidence to support this. US business surveys highlight the struggle to fill jobs with suitable applicants. Employers are responding to this challenge using a combination of policies involving more automation, training and even offering higher wages. According to the US Federal Reserve, “firms were coping with labour shortages by increasing salaries and benefits in order to attract or retain workers.” Rising US wages as seen in the Average Hourly Earnings growth rate (blue line) support this view.
However, the most surprising aspect of the current environment is that US wage increases have been reasonably modest at only 2.7%. In 2007 when the labour market was similarly stretched with limited spare capacity, US wages growth was running at 3.5% annual pace. So why are US workers so cautious in exercising their increased bargaining power to push for higher wages? Essentially we do not know. Perhaps there are many discouraged workers who are sitting on the sidelines, so there is more space capacity than the unemployment rate indicates. Perhaps the painful memory of the GFC is still constraining workers from pushing for higher wages. So the US labour market is a puzzle presently and only time will resolve this conundrum.
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