The June Jobs Report was a pretty good one, with total non-farm payrolls increasing by 288,000. Digging a little deeper, we see that the jobs created were in different industries as well, which represents uniform growth:
Total nonfarm payroll employment increased by 288,000 in June, and the unemployment rate declined to 6.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains were widespread, led by employment growth in professional and business services, retail trade, food services and drinking places, and health care.
There are certainly some issues with the jobs situation, of course. A big part of the jobs increase is the hiring of food service workers, which tend to be less skilled and lower wage jobs. Moreover, the number of long-term unemployed remains elevated, but has dropped significantly despite (or perhaps partly because of) the ending of extended unemployment benefits:
The number of long-term unemployed (those jobless for 27 weeks or more) declined by 293,000 in June to 3.1 million; these individuals accounted for 32.8 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has decreased by 1.2 million.
The unemployment rate of 6.1% is somewhat misleading, as the number of folks who have quit looking for a job remains quite high, as detailed by Zero Hedge here:
Moreover, two million people had looked for a job in the last twelve months but not in the month of June, so these “marginally attached workers” were not counted in the unemployment rate in the June Jobs Report.
One other interesting aspect of the June Jobs Report is the slow growth of wages. Pundits of all stripes focus on the lack of wage growth to argue that the economy is not creating the “right” kind of jobs (i.e., higher paying ones), or to justify a state-mandated increase of wage growth (i.e., an increased minimum wage). Federal Reserve Chairwoman Janet Yellen has been particularly focused on wage growth in her speeches regarding the economy as of late:
Worker efficiency is especially important because of the emphasis Yellen has placed on the need for higher wages. If employees are able to produce more, companies can pay them more without needing to raise prices to keep profits up.
She told reporters she anticipates wage growth will pick up as the labor market tightens and argued this wouldn’t be inflationary as long as the increase isn’t overly rapid. Compensation recently has been growing about 2 percent a year, by Yellen’s reckoning.
Compensation increases of as much as 4 percent would be “normal” and consistent with the Fed’s 2 percent inflation goal, she said during a March 19 press conference. That, though, assumes productivity growth doesn’t slacken.
Interestingly, Charles Plosser (President of the Philadelphia Federal Reserve Bank) appears to think that wage growth is a lagging indicator, meaning that if wage growth spikes–inflation is here already.
Joe Weisenthal, a.k.a. The Stalwart, over at Business Insider, suggests that the low rate of wage growth gives Yellen some room to remain “accommodative” with short term interest rates:
In June, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $24.45, following a 6-cent increase in May. Over the past 12 months, average hourly earnings have risen by 2.0 percent. In June, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $20.58.
With this as background, how would an increase in the minimum wage affect average hourly earnings?
While it’s true that a small percentage of Americans are at the minimum wage (roughly 1.1%, as of the latest data available), the push for $10.10 as the new minimum wage represents a hike which is projected to affect 16.5 million workers, according to the CBO and the White House. Moreover, a hike in the minimum wage puts pressure on employers of those currently being paid a bit more than $10.10 per hour to pay them more. The White House and the CBO refers to this as a “ripple effect” of wage growth.
There are numerous problems with a state-mandated minimum wage hike, which our writers have detailed here on several different occasions. Besides being an added cost on business (particularly small business) which causes price increases, one additional problem with a minimum wage hike of the $10.10 magnitude is that it could artificially increase the average hourly earnings rate which Yellen and other members of the Fed are watching intently. If that number spikes because of a minimum wage increase, the Federal Reserve may decide to “prematurely” act on rates. A sudden turn by the Fed to the hawkish side (meaning anti-inflation) could spook the bond market and cause the economy to sputter. The Fed has a history of acting at the wrong time and in the wrong manner (see Depression, Great)
Folks on the left push for dramatic state-imposed minimum wage increases, which–without productivity increases–will force business to either cut hours, fire workers, or increase costs. Now, there may be an additional concern: the Federal Reserve raising short-term interest rates.
Whether rates should be raised or not is a subject for another time, of course, and is outside the scope of this post. Of course, as pointed out in that FreedomWorks post, a free market which sets interest rates naturally has shorter recessions and faster recoveries. We ought to keep this in mind when pushing for reform.
As always, free markets are better markets.