Friday, January 8, 2016

Five graphs for 2016: #1, underemployment and wages

 - by New Deal democrat

This is the final installment of my 5 graphs to watch in 2016.  Previously I have described:

#5.  The yield curve
#4.  The trade weighted US$
#3.  The inventory to sales ratio
#2.  Not in Labor Force, but Want a Job Now

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion.  In this expansion, however, nominal increases have averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power.  This is shown in red in the graph below:

There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers. This expanded "U6" unemployment rate is shown in blue in the graph above.

In the above graph, both YoY nominal wage growth and the U6 underemployment rate are normed to their most recent values from the November employment report.

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate.  If the economic expansion continues, the U6 unemployment rate should continue to decline, and I would expect to see increasing wage growth.

I am especially fearful that poor wage growth now may mean actual wage deflation - for the first time since the 1930s - when inevitably the next recession occurs.  This is thus the most crucial graph of all, and it is the #1 graph to watch in 2016.