Weak pay growth puz­zles Fed chief, just like every­one else

The Myanmar Times - Weekend - - International Business -

HALF­WAY through a news con­fer­ence Wed­nes­day, the head of the world’s most pow­er­ful cen­tral bank was asked a ques­tion weigh­ing on the minds — and the checking ac­counts — of Amer­i­cans ev­ery­where:

When will peo­ple fi­nally start get­ting mean­ing­ful pay raises?

Jerome Pow­ell, the chair­man of the Fed­eral Re­serve, had no sat­is­fac­tory an­swer. He called it a “puz­zle.” And then, as if mea­sur­ing his words, he said he wasn’t pre­pared to call it a “mystery.”

Puz­zle or mystery, the source of the con­ster­na­tion is this: The U.S. un­em­ploy­ment rate has dropped to a multi-decade low of 3.8 per­cent. A short­age of qual­i­fied peo­ple to hire has frus­trated many em­ploy­ers who have com­plained that they can’t fill job open­ings.

In the­ory, those two fac­tors should com­bine to un­leash a wave of ro­bust pay raises for every­one from con­struc­tion crews, teachers, ac­coun­tants and ho­tel clerks to en­gi­neers, jan­i­tors, butch­ers, baris­tas and even sum­mer in­terns.

It hasn’t hap­pened — not in most in­dus­tries, any­way.

Pow­ell ac­knowl­edged that he couldn’t say for sure why wage growth re­mains gen­er­ally tepid. He said he “cer­tainly would have ex­pected pay raises to re­act more” to fall­ing un­em­ploy­ment.

Echo­ing what other econ­o­mists, in­clud­ing his pre­de­ces­sors and col­leagues at the Fed, have sug­gested, Pow­ell of­fered up one likely fac­tor: the econ­omy’s rel­a­tively low pro­duc­tiv­ity growth. Put sim­ply, Amer­i­can work­ers aren’t gen­er­at­ing enough ad­di­tional value for each hour on the job.

Some econ­o­mists say com­pa­nies have in­vested too lit­tle in cap­i­tal equip­ment that would ac­cel­er­ate worker pro­duc­tiv­ity. Oth­ers say ear­lier tech­no­log­i­cal break­throughs that did speed pro­duc­tiv­ity have yet to be du­pli­cated. But no one is sure.

“So it’s a bit of a puz­zle,” the chair­man mused, some­what philo­soph­i­cally. “I wouldn’t say it’s a mystery. But it’s, it’s a bit of a puz­zle.”

Pow­ell didn’t ex­plain his dis­tinc­tion be­tween puz­zle and mystery. But he has used sim­i­lar for­mu­la­tions be­fore. In 2017, as a Fed gov­er­nor, Pow­ell told CNBC that the per­sis­tence of in­fla­tion re­main­ing be­low the cen­tral bank’s 2 per­cent tar­get af­ter years of mon­e­tary stim­u­lus was “kind of a mystery.”

Yet in re­cent months, in­fla­tion seems to have picked up, driven by higher oil prices. Fed of­fi­cials es­ti­mated Wed­nes­day that in­fla­tion would run slightly above its tar­get through 2020. That fore­cast ap­peared to sug­gest that low un­em­ploy­ment and a gap­ing fed­eral bud­get deficit in the wake of Pres­i­dent Don­ald Trump’s tax cuts would fi­nally keep in­fla­tion at or above the Fed’s an­nual 2 per­cent tar­get rate.

This new­found in­fla­tion is ac­tu­ally some­thing of a chal­lenge for many work­ers. Af­ter fac­tor­ing in in­fla­tion, av­er­age hourly earn­ings have been flat for the past year, the La­bor De­part­ment said this week. For work­ers who aren’t su­per­vi­sors, wages have ac­tu­ally fallen slightly de­spite the rush of hir­ing in an eco­nomic ex­pan­sion on the verge of com­plet­ing its ninth year.

What econ­o­mists call the “Phillips curve” — which says low un­em­ploy­ment should ac­cel­er­ate pay growth — ap­pears to be bro­ken or twisted. Or at least op­er­at­ing on a se­vere de­lay.

Other econ­o­mists have sug­gested an­swers that go be­yond the Fed’s man­date of us­ing in­ter­est rates, as­set pur­chases and public com­mu­ni­ca­tion to sta­bi­lize prices and max­i­mize em­ploy­ment. The lib­eral Eco­nomic Pol­icy In­sti­tute re­leased a study in 2016 show­ing that the long-stand­ing de­cline in union mem­ber­ship had come at the ex­pense of worker pay raises.

Other econ­o­mists note that Amer­i­cans have found them­selves in­creas­ingly in com­pe­ti­tion with for­eigner work­ers who earn less and that this fac­tor has sup­pressed wages in some in­dus­tries.

Sep­a­rate re­search has that found higher wages are now con­cen­trated at ex­cep­tion­ally prof­itable tech dar­lings like Face­book, where fed­eral fil­ings show me­dian pay topped $240,000 last year. Work­ers at many less prof­itable firms are be­ing left be­hind.

Then there’s the is­sue of some work­ers be­ing forced to sign non- com­pete agree­ments. And there’s the rise of what econ­o­mists call a “monop­sony.” That tongue-trip­ping term refers to in­dus­tries or com­mu­ni­ties with just a few very large em­ploy­ers. Re­search has found that em­ploy­ers in such cases can limit pay growth be­cause work­ers have few op­tions to quit for sim­i­lar jobs at ri­val em­ploy­ers.

On Wed­nes­day, Pow­ell ended his new con­fer­ence with an an­swer to a ques­tion about whether most work­ers will see sig­nif­i­cant raises, given the money that ma­jor com­pa­nies are pour­ing into stock buy­backs rather than into pay.

The Fed chair­man stressed that he still thought a strong job mar­ket would pro­pel faster pay growth in time. Yet, he added, re­fer­ring to com­pa­nies that re­ward in­vestors above work­ers, “we don’t re­ally have the tools that will ad­dress the dis­tri­bu­tion of prof­its and that kind of thing.”

With those words, Pow­ell left the lectern. – AP

Jerome Pow­ell, the chair­man of the Fed­eral Re­serve. Photo: AP

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