Slow Wage Growth: Not a Sign of a Weak Labor Market

The February employment summary released last week by the Bureau of Labor Statistics was nearly all positive, with job growth of 242,000 for the month and a 15-month high reported for the labor force participation rate.

The one factor which many analysts have cited as holding back homeownership, wage growth, took a step back in February. The average hourly earnings for all employees declined by 3 cents down to $25.35 after an increase of 12 cents in January.

According to a recent economic letter released by the Federal Reserve Bank of San Francisco, slow wage growth is not a sign of a weak labor market—but rather, it is a reflection of cyclical and secular shifts in the composition. Authors Mary C. Daly (SVP and associate director of research in the Economic Research Department of the San Francisco Fed), Bart Hobijn (professor of economics at Arizona State University), and Benjamin Pyle (research associate in the Economic Research Department of the San Francisco Fed) said the combination of baby boomers who were paid higher wages retiring and lower-wage workers getting back into the workforce has suppressed wage growth.

The wage gains of continuously employed full-time workers can push up wage growth, while the exit of higher-wage workers replaced by entry-level employees making much less can be a drag on wage growth, according to the authors of the economic letter.

Average wage growth has been slow during the recession and has stayed flat during the recovery—it has hovered around 2 and a quarter percent for the last two years, whereas it averaged 3 and a quarter percent from 1983 to 2015, according to the San Francisco Fed.

As the spring homebuying season is right around the corner, there were some concerns in the industry about home price acceleration outpacing wage growth, which would put a strain on affordability.

“Our forecast of a more modest gain in home sales this year reflects our concern of declining housing affordability from income growth that is trailing home price appreciation,” Fannie Mae Chief Economist Doug Duncan said, adding that the February employment summary “is consistent with our view of an affordability-constrained housing expansion.”

Some expect that wage growth will not stay down in 2016. Curt Long, Chief Economist with the National Association of Federal Credit Unions, said that February’s wage growth was “disappointing, particularly coming after a strong month in January. With that said, once inflation is considered, 2.2 percent wage growth is not terrible, and as the labor market continues to tighten we should see that figure climb.”

Still some are predicting big things for the spring homebuying season in spite of the slower wage growth. Jonathan Smoke, Chief Economist with Realtor.com, said he believes that the “strong pace of job creation should lead to continued positive household formation.”