(Bloomberg Opinion) – For all the impressive performance of the U.S. job market, the failure of workers' wages to keep pace remains something of a mystery. It's a little easier to understand, though, if you consider how much those workers are producing.
By most indications, the demand for workers has reached the point where it should be pushing up wages more than it has. In September, nonfarm employers added 134,000 jobs and the unemployment rate declined to 3.7%, the lowest since 1969. Yet the average hourly wage was up just 2.8% from a year earlier, far short of the pace that prevailed in previous expansions. Here’s how that looks:
How much companies can pay depends to a large extent on how productive their employees are. And in this expansion, labor productivity -- measured as output per hour -- hasn’t been growing very quickly. On average, it has gained 1.1% a year since mid-2009, compared with 2% in the preceding 30 years. Initially, workers weren't getting even a piece of that: As of late 2014, their hourly compensation was actually down in inflation-adjusted terms. Since then, it has at least partially caught up:
As a result, the share of productivity gains going to workers isn’t all that unusual compared with recent history. In the last five significant economic expansions, wages grew a little more than half as fast as productivity. In the current expansion, they've grown a little less than half as fast:
To make more room for raises, the U.S. needs more productivity growth. To that end, government policies matter. The tax system can encourage companies to do more productivity-enhancing investment. Spending on fundamental research and infrastructure can facilitate innovation and help the whole economy work better. Well-crafted immigration rules can render the U.S. more attractive for highly skilled workers.
The Trump administration's efforts have been mixed at best. On the bright side, the tax cuts that the president signed into law last year -- for all their flaws -- might be having a desirable effect. Changes in corporate rates have prompted companies to repatriate overseas profits, and data on business investment suggest that they're putting more money into improved facilities and technology. In one positive sign, output per hour jumped to an estimated 2.9% annualized rate in the second quarter of 2018.
Beyond that, Trump has fallen short. Promises of big infrastructure spending have not come to fruition. The reality of the administration's immigration policy contrasts sharply with his stated goal of welcoming skilled workers. And his penchant for running big budget deficits -- at a time when the government should be getting its finances under control -- could ultimately push up interest rates and crowd out private investment.
To be clear, productivity growth was slow long before Trump became president. But if he wants to increase the living standards of the people who voted for him, he needs to do a better job of addressing it.
