How Long Will Wage Restraint Persist? Prospects For Wage Inflation in Advanced Economies Jacob Funk Kirkegaard Senior Fellow 4/4/2018 Peterson Institute for International Economics 1750 Massachusetts Ave., NW Washington, DC 20036 1
Agenda I. Wage Inflation Weak Despite Standard Indicators Suggesting Tight Labor Markets II. Broader Measures of Labor Slack and Underemployment Now Diverging III. Conclusion
I. Nominal Wage Growth Has Been Weak Post-GR 5 United States Japan Euro Area 4 3 U.S. Average 2002-07 = 3.0% 2 1 0-1 2002-01-01 2002-05-01 2002-09-01 2003-01-01 2003-05-01 2003-09-01 2004-01-01 2004-05-01 2004-09-01 2005-01-01 2005-05-01 2005-09-01 2006-01-01 2006-05-01 2006-09-01 2007-01-01 2007-05-01 2007-09-01 2008-01-01 2008-05-01 2008-09-01 2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 2017-09-01-2 -3-4 -5 U.S. Data: Average of percent change from previous year of 1) ECI total compensation private industry; 2) ECI Wages and Salaries private industry; 3) Full-time median usual weekly earnings 16y and above; and 4) Average hourly earnings of production and nonsupervisory employees. Source: BLS Japan Data: Total cash earnings, percent change from last year, firms with more than 5 employees in all industries. Source: Ministry of Health, Labour and Welfare EA19 Data: Hourly earnings, private sector workers. Source: Eurostat
I. Yet Unemployment is Low Even in EA 14 12 Standardized Unemployment Rates in US, Japan and Euro Area 2000-present United States Japan Euro Area 10 8 6 4 2 0 Note: Dotted lines traces the most recent data points back in time. Source: Eurostat 2000M01 2000M05 2000M09 2001M01 2001M05 2001M09 2002M01 2002M05 2002M09 2003M01 2003M05 2003M09 2004M01 2004M05 2004M09 2005M01 2005M05 2005M09 2006M01 2006M05 2006M09 2007M01 2007M05 2007M09 2008M01 2008M05 2008M09 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09 2013M01 2013M05 2013M09 2014M01 2014M05 2014M09 2015M01 2015M05 2015M09 2016M01 2016M05 2016M09 2017M01 2017M05 2017M09 2018M01
I. And LFP is Now Rising Everywhere 80 78 Labor Force Participation 15-64y, Total Population Q1 1997-Q3 2017 United States Japan Euro Area 76 74 72 70 68 66 64 Source: Eurostat
II. 18 U6 Broad US Underemployment Measure Has Now Reached Pre-crisis Levels US U6 Unemployment Rate Jan 2002 - Feb 2018 Unemployment Rate Discouraged Workers All Other Marginally Attached Workers Part-Time For Economic Reasons 16 14 12 Source: BLS 10 8 US ~Pre-Crisis Level 6 4 2 0 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18
18 II. Broad Japan Underemployment Measure Has Been Falling, But From a High Level Japan "Approximate U6 Definition Unemployment Rate" Q1 2002 - Q4 2017, Percent Non-Regular Employee Wishing to Change Job But Not Obtaining a Job as a Regular Employee Not in Labor Force Wishing to Work Unemployment Rate First Available Data 16 14 Source: Statistics Japan LFS 12 10 8 6 No national data due to Fukushima 4 2 0 Mar-02 Dec-02 Sep-03 Jun-04 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17
II. Broad EA Underemployment Measure Remains Elevated Euro Area "U6 Unemployment Rate ECB Definition" Q1 2005-2020Q2(p) Under-Employed Part-Time Workers Persons Available to Work But Not Seeking Persons Seeking Work But Not Available To Work Unemployment Rate 25 20 Source: ECB; Eurostat First Available Data Predicted Data with LFP Frozen at Q4 2017 Levels 15 Euro Area ~Pre-Crisis Level 10 5 0 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2
II. Underemployment Levels Diverging US: Measured underemployment rose significantly during crisis, but is now approaching pre-crisis lows (earlier levels during dot-com bubble unknown). This would suggest higher US wage growth is imminent. Yet, several issues cause uncertainty; Slow productivity growth if productivity growth is 1 percent p.a., why should wages rise any faster? Declining U.S. unionization perhaps, but private sector unionization was already very low (~10 percent) in the late 1990s Non-compete clauses and firm concentration/ local labor monopsony power Rise of gig economy, temp agencies and outsourced business services slow wage growth in all but the super-star firms Japan: Measured underemployment did not rise much during the crisis, and while now falling appears still to be at a significantly higher level than in the United States 12 vs. 8 percent. This would suggest that wage growth in Japan will remain subdued in the near term. Additional uncertainty arise from; Deflationary mindset among consumers and firms Declining total and working age population
II. Underemployment Levels Diverging 20 18 16 Germany "U6 Unemployment Rate ECB Definition" Q1 2005-2017 Under-Employed Part-Time Workers Persons Available to Work But Not Seeking Persons Seeking Work But Not Available To Work Unemployment Rate First Available Data 14 12 Source: ECB; Eurostat 10 8 6 4 2 0 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3
II. German Wages Yet to Pick Up, But. German Negotiated and Take Home Wages in the Production Sector incl. Construction, Percent Change over Previous Year Q4 1992- Q4 2017 14% Negotiated wages, including holiday pay, chrismas bonus, other regular special payments and capital formation and employer pension contributions Wages and salaries, actual take home pay 12% 10% 8% 6% Source: German Bundesbank 4% 2% 0% -2% Dec-92 Jul-93 Feb-94 Sep-94 Apr-95 Nov-95 Jun-96 Jan-97 Aug-97 Mar-98 Oct-98 May-99 Dec-99 Jul-00 Feb-01 Sep-01 Apr-02 Nov-02 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16 Nov-16 Jun-17
III. Concluding Remarks 1. Underemployment levels suggest U.S. wage inflation should soon accelerate, but remain weak in both Japan and Euro area 2. German workers will probably only push euro area wage growth up marginally in coming years 3. Both BoJ and ECB look likely to continue to struggle to reach their inflation targets and despite strong GDP growth change monetary policy only gradually