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July Jobs Report Mini-Mystery: What’s Up With Wages?

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August 9, 2017
Clues to Jobs Report Mini-Mystery
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There’s a bit of a mystery afoot. It’s not a whodunit being investigated by your favorite TV sleuth or a missing person case for those prime-time lawyers to solve in the nick of time. Rather, it’s a head-scratcher for the economic-minded, in the wake of the July 2017 jobs report.

Wait, don’t stop reading; it might actually matter for you and how much you get paid.

See, the number of jobs in the United States has been growing and unemployment has been falling. But wages have not been rising all that quickly.

As the economic growth in the United States improves, employers hire more. In other words, they’re demanding more labor, with some firms having trouble finding qualified help. That should cause the price of labor—aka wages—to rise as well.

Clue #1: More People Are Finding Jobs

“As more jobs need to be filled that's one of the things that leads to wage pressure,” said JJ Kinahan, Chief Market Strategist at TD Ameritrade. We are seeing some wage growth. But the question is: Why we aren’t seeing more?

Wages are one of the reasons people on Friday were watching what the Bureau of Labor Statistics (BLS) had to say about the state of the jobs market.

Sure, people want to know the headline figure each month. In July, non-farm payroll employment rose by 209,000 people, ahead of the monthly average of 184,000 so far this year.

But wage growth was also of particular interest as a signal for inflation, said Shawn Cruz, Senior Market Structure Specialist at TD Ameritrade. On Friday, the government stats showed that average hourly earnings for all employees on non-farm payrolls rose by 9 cents to $26.36, putting them 2.5 percent ahead of where they were at this time last year. “While there has been some wage growth, there hasn’t been as much as you might think for this type of labor market,” Cruz said.

Theories as to why include that lower levels of unionization could be leading to workers not having as much bargaining power over wages, or there just may not be enough qualified workers.

Bob Johnson, director of economic analysis at Morningstar, said in a video report after the previous jobs data were released that, by now, he would have guessed wage growth would be at more than 3 percent.

Demographics is one of the issues keeping that figure lower as higher-paid Baby Boomers retire and are replaced by lower-paid younger workers, he said.

Clue #2: What We Earn and What it will Buy

“If wages end up growing enough, that will eventually translate into inflation,” Cruz said. “When this will happen is a mystery that a lot of market watchers have been trying to figure out.”

The good news is that wages have been growing, Kinahan said. “We are absolutely seeing growth in the right direction,” he said. At this point, the benefits to having wages grow for several months outweigh risks for higher inflation, according to Kinahan. "After all, we’re not even at the Federal Reserve’s 2 percent inflation target," he said.

This week, we’ll get some other clues about inflation from the Bureau of Labor Statistics.

On Thursday morning, the BLS releases the July Producer Price Index (PPI). Watch for whether producers have enough confidence to start raising some prices, Kinahan said. And the July Consumer Price Index (CPI), due out Friday morning, will give an update on what consumers are having to spend on various goods and services.

In other words, by the end of this week we should be clued in to what it costs to buy what Americans buy, and compare it to what Americans earn. From there we can apply a little deductive reasoning to assess the state of the U.S. economy.

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