One Sign Americans Won't See Big Raises Anytime Soon

U.S. employers are hiring more workers who previously weren't even looking for a job

Inside The Eagle Ford Shale Job Fair Ahead Of Initial Jobless Claims Figures

Job seekers fill out applications during the Eagle Ford Shale Job Fair at the American Bank Center in Corpus Christi, Texas, U.S., on Wednesday, Oct. 29, 2014.

Photographer: Eddie Seal/Bloomberg

If you're hoping to get a big raise soon, you may be kept waiting.  

The reason? Americans re-entering the working world could hold down pay rates. Companies are taking on an increasing share of people from outside the workforce (as in, people who haven't been regularly applying for jobs), while a declining share of new hires are previously unemployed people who have been actively looking for work, according to data from the Bureau of Labor Statistics.

It's hard to tell why more hires come from outside of the labor force, Bank of America Merill Lynch economist Emanuella Enenajor wrote in a note last week -- the figures don’t distinguish between former workers re-entering the labor pool and recent college graduates gaining their first jobs, for instance. 

What is clear, displayed in the Bank of America graphic below, is that a shift is under way. Though the unemployed were nabbing an elevated portion of new positions right after the recession, new entrants into the workforce are now getting the upper hand. 

Source: Bank of America Merrill Lynch

There are other, clearer signs that more Americans are re-entering after sitting on the sidelines of the labor force as job prospects improve. Exhibit A: The share of people who are either working or looking for work, shown in the chart below, has finally stabilized after falling in the 2007-2009 downturn and the subsequent recovery.

The good news is that people are feeling optimistic enough about their chances — whether they just got out of school or were fired in the downturn — that they're looking for employment. That means those Americans aren't permanently giving up on earning a paycheck, something that would also diminish the size of the U.S. labor force and hold back the economy's capacity to grow. The bad news is that the healing job market will take more time to translate to faster pay gains. Wage growth so far has been "sluggish," Fed Chair Janet Yellen said in testimony to Congress on Tuesday.

An expanded pool of able and willing workers keeps the unemployment rate from falling as fast as it otherwise would. The increased supply keeps companies from confronting a staffing shortage, which would force them to raise wages to attract talent.

What's more, workers who are willing to rejoin the workforce from outside the labor pool tend to accept salaries that are about 25 percent lower compared to job seekers who have been actively searching for employment, past research has shown. 

"Individuals persistently out of work may have atrophied skills or dwindled savings, suggesting a lower bar to accept work," Enenajor wrote. Having a big pool of potential hires who are willing to accept lower pay "points to a further softening in the relationship between the jobless rate and wages."

For more, read this QuickTake: Monthly U.S. Jobs Report

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