Why Is America’s Wages Rising So Slowly?

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By Jacob Maslow

income questionsThere are a lot of investors who are studying employment figures very closely because the US Federal Reserve is also keeping an eagle eye on these figures. If the overall picture that emerges from America’s jobs statistics indicate that the broader US economy is improving, then the US Federal Reserve would have the justification it needs to raise interest rates. Investors in a hot market are always looking to cash out their profits. Put simply, they’re always looking for an excuse to sell. One of the best reasons to sell, of course, is when interest rates are going up. This makes stocks less attractive. It’s no surprise, then, that a lot of attention has been focused recently on the average hourly wages report.

According to government figures, Americans average hourly wages rose only 0.1%. This is in keeping with the fact that the middle class in the United States is actually making less money per household than in 2008. Imagine that. Seven years of wage decline or stagnation. This is unprecedented, because ever since World War II, US household income has been growing at a steady clip. That being said, a lot of analysts have made a big deal about this disappointing number. They pair this with the scenario that the US Federal Reserve would increase interest rates this year.

I beg to differ. The reason why American hourly wages are growing so slowly is because most of the job growth in the United States is in low wage sectors. I am, of course, talking about the service industry. The service industry is a low-wage industry. It has always been a low-wage segment of the total employment picture. This may be too much drama and exaggeration over something that naturally flows from the job growth in the United States. The better analysis would be to look at the impact of historically low labor force participation. It appears that as more and more Americans retire and as more younger Americans look for alternative ways of making money, there are less and less people competing for jobs. This is a better scenario for the US Federal Reserve. If this happens, and this trend continues, 5.5% unemployment rate is actually an optimal employment rate. This means that all the people worth giving a job to are already working. Whoever’s left aren’t really trying hard enough, or they just don’t have the right skills, or they just have personal issues that prevent them from landing a job. Regardless of the reason, 5.5% would be an optimal rate. In this scenario, interest rates are more likely to increase because there is no chance that there would be a flood of jobseekers which would then spike up the jobless rate.

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