How Much in Wages Are American Workers Missing?

Every month, the U.S. Bureau of Labor Statistics releases estimates of the number of job openings, hires, fires, and other interesting labor market statistics.  The report is formally known as the Job Openings and Labor Turnover Survey (JOLTS, for short).

Among the reasons economists, investment bankers, and other financial professionals watch the JOLTS report is for signals on where wage growth might be heading.

The general presumption is that wage growth picks up when job openings per unemployed individual declines (i.e. when there are lots of job openings for every unemployed worker, it’s a signal that the labor market is tightening).

The Actual Connection Between Job Openings per Unemployed and Wage Growth

Here’s a look at the actual connection between job openings per unemployed worker and wage growth (year-over-year wage growth). On the horizontal axis is the job openings per unemployed worker, currently at a quite low 1.59. Over the past 15 years, the job openings per unemployed worker figure has floated between about 1.5 and 7, meaning that the current 1.59 is close to its all-time low.  And wage growth is only 2.6%! On the vertical axis is the year-over-year growth in wages, as approximated by the Employment Cost Index (commonly referred to as the ECI).

The relationship between the two is, as one would expect, downward sloping. The downward sloping correlation implies (no discussion here of causation) that when job openings per unemployed worker is low (i.e. when there are lots of jobs per unemployed individual), wage growth accelerates.  This makes sense.  When the labor market gets tighter, competition for workers happens through higher wages.

The opposite also holds.  During a recession when there’s lots of jobs per unemployed worker, wage growth generally weakens or slows.

Now, take a look at the data points that are, relatively speaking, far away from the regression line.

What years are they?  2012 to 2015 (bottom left corner).  The relationship between job openings per unemployed worker and wage growth has broken down over the past few years.

Job Openings and Wage Growth

Assigning a Value to the Wage Growth/Job Openings Picture

With the weakening of the relationship between job openings and wage growth as the background, two questions come to mind. First, what should wage growth be?  And second, how much money does it represent?

Addressing the wage growth rate question first, what would wage growth be if the historical relationship between job openings and wage growth held? The regression line at a job openings per unemployed value of 1.59 (what it is today) predicts an annual wage growth of 3.4%. What is it today?  2.6%.

So, if the relationship were to have held, there’s 0.8% in wage growth missing from the American laborer.

How Much Is 2.6%?

Switching to the second question, how much does the 2.6% versus 3.4% wage growth differential equate to? Essentially, if wages grew at 3.4% instead of 2.6%, workers would have another $63 billion in their pockets.

It’s a chunk of change in an American economy that’s struggling to grow by 3% or so.

Conclusion

Overall, although not too surprising to individuals watching the details of the macroeconomic environment, the connection between job openings and wage growth has deteriorated in recent years.

If the historical relationship between job openings and wage growth were to have held in 2015, then American workers would have about another $63 billion in their pockets.

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