US Economy Prepares for Falling Unemployment and Rising Wage Growth

Spend Matters welcomes this guest article from IHS.

All eyes are on the Federal Reserve Bank (FED) for a possible interest rate hike in July or September. As a result, the various measures of unemployment published by the Bureau of Labor Statistics are being closely followed by markets as indicators of potential FED action. FED Chair Janet Yellen uses these measures of unemployment, among several other indicators, to assess the well being of the economy. While unemployment fell throughout 2014 and is expected to come down further in 2015, wage growth has been relatively flat. The question markets should be asking is what will happen to wage growth in 2015?

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IHS expects wage growth to gain traction in 2015 as strong employment gains take the slack out of labor markets. Wage escalation will accelerate from 2.0% in 2014 to 2.4% in 2015. As usual, the pickup in wage escalation will vary among different industries as well as occupations. The construction industry will experience the strongest wage growth, while the mining industry will experience wage declines.

IHS

Economic growth, combined with falling unemployment and strong payroll growth, will underpin an improvement in wages during 2015. However, a large pool of discouraged workers will keep nominal wage escalation in the 2–3% range over the next year. Real wage gains will outpace nominal wage growth thanks to the falling inflation rate.

There are certain factors that indicate why we might have strong wage growth in 2015. The unemployment rate in the United States fell to 5.5% in February 2015. This is the lowest level since 2008. Initial unemployment claims have fallen below 300,000, signaling that the economy is able to support sustained job growth with new hires exceeding layoffs. The unemployment rate for college graduates has fallen to 2.5%, from its peak of 5% during the recession. Both job openings, as measured by the Job Openings and Labor Turnover Survey (JOLTS), and hiring activity continued to improve over the fourth quarter of 2014.

A deeper look into the unemployment figures may provide the explanation as to why wage increases may not be as high. Labor force participation is still low and the long-term unemployment rate is still very high. The broadest measure of unemployment that measures those who are unemployed, as well as those who are marginally attached and employed part-time for economic reasons (U-6) remains elevated at 10.9% in March 2015, although it has been coming down from 17.1% reported in October 2009.

Bottom Line: The US labor market will continue to improve over 2015, with tightening labor markets supporting stronger wage growth. The improving economic outlook means companies are less hesitant to add to their staff. Looking forward, the unemployment rate will fall from an average of 6.2% in 2014 to 5.5% in 2015 and 5.2% in 2016. As labor markets tighten, the bargaining pendulum will swing away from employers toward neutral. In industries experiencing rapid growth and shortages, employees will hold the negotiating power and experience above-average wage growth.

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