Investment Insights

Investment Insights: Where is Wage Growth?

6 August 2018

By Cliff Aque, CFA, Investment Strategist

The ADP National Employment Report released August 1, 2018 showed that private sector employment in July added 219,000 jobs, which was above expectations and the largest gain since February . The labor market is tight with unemployment levels at the lowest level since 1969, and more people are quitting their jobs versus being fired than ever before (see chart below). Presumably people are quitting for higher paying jobs, but wage growth remains stubbornly low.


Given this historically tight labor market, many are surprised that wage growth has not been accelerating. In fact, as of the last report from the U.S. Bureau of Labor Statistics, it had not even kept pace with inflation. As of June 2018, the Consumer Price Index rose 2.9% before seasonal adjustment over the previous 12 months , while average hourly earnings only rose by 2.7% over the same timeframe.

One potential reason is that, despite this higher inflation number in June, inflation has been persistently low since the Great Financial Crisis (“GFC”), with the exception of a brief 12-month pick-up between 2011 and 2012. Should inflation prove to be a more lasting force and the labor markets remain tight, wage growth should follow.

Productivity growth is also tied closely to wage growth, but has also been persistently low since the GFC. During the current business cycle, growth in labor productivity, output, and hours worked are the lowest of any of the last ten cycles going back to 1948, with the exception of a six-quarter period between 1980 and 1981 . Like inflation, if productivity can accelerate, wages should as well.