Next U.S. President Will Face Uphill Struggle to Deliver Higher Wages

Economic policies will be working against the tide of demographics
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Donald Trump and Hillary Clinton on stage during the first U.S. presidential debate on Sept. 26.

Photographer: Andrew Harrer/Bloomberg

Both Democrat Hillary Clinton and Republican Donald Trump have said they would work to get Americans a raise if they win the White House. Simple demographics are a reason for skepticism. 

Population aging is dragging down overall wages, research from the Federal Reserve Bank of New York shows. That's the top story in this week's research wrap, which also looks at the influence of economic conditions on mortality, wage dynamics by firm size and inflation overshoot. Check back every Tuesday for a guide to interesting or impactful economic research released in the prior week. 

When politicians talk up higher wages

...know that they'll be working against demography. The aggregate real-wage growth rate peaked in the mid-1980s at around 1.8 percent, New York Fed researchers find. They look at what they call a "cyclically neutral" wage growth rate: the one that would occur over time in a labor market that's neither especially tight nor especially loose.

Since the '80's, the U.S. adult population has aged, which slows overall pay growth because workers see faster gains earlier in their careers, and eases labor productivity gains since career-related learning is "front-loaded." The trend has helped to cut the cyclically neutral real-wage growth rate by about a third, to around 1.2 percent. 

And America isn't getting any younger. "The aging of the U.S. population will continue to act as a headwind to labor productivity and wage growth," authors Robert Rich, Joseph Tracy and Ellen Fu write. 

U.S. Real Wage Growth: Slowing Down With Age
Published Sept. 28, 2016
Available at the New York Fed website

Economic booms can kill you

No kidding. While major economic booms improve adult outcomes, mortality actually increases after smaller ones. Pollution is the major cause, though increased alcohol consumption also plays a role. That's particularly true in Russia, "where binge drinking is relatively common."

It's a different story for kids. People who experience booms during adolescence actually have better outcomes, ending up with "more satisfying lives, better social connections and improved mental health and cognitive abilities" despite the increased pollution spurred by expansion-era production. 

Economic Conditions and Mortality: Evidence From 200 Years of Data
Released September 2016
Available at National Bureau of Economic Research website  

When it comes to tight labor markets and pay, firm size matters

Tight labor markets won't be the game-changer that gets you get a raise if you're working full-time for a big company, based on a study of employees in Japan. Smaller companies react more to labor-market conditions, while people working at large Japanese firms mostly see fatter paychecks based on changes in inflation and union negotiations.

Why the difference? It may be that people change jobs more in the small- and medium-enterprise labor market, making it more likely that those firms "face the risk of being unable to sustain employees." 

The base salary of part-time workers, meanwhile, is determined by labor-market tightness and minimum-wage increases. The study looks at base pay, not bonuses.

What Determines the Base Salary of Full-time/Part-time Workers?
Published Sept. 30, 2016
Available on the Bank of Japan website

The case for central bank inflation overshoot might have grown

Olivier Blanchard, the former International Monetary Fund research department director, makes the case for higher inflation targets in the U.S., Japan and Europe. The piece is more opinion than research but earns a spot on this list because it's a concise summary of an agenda-setting debate in global economics. 

Blanchard says "there is a strong argument that all three should accept and engineer higher inflation," albeit for different reasons. In the U.S., doing so would provide insurance against recession, because it would give the Fed more room to cut real rates in a downturn. In the euro area, Germany in particular could let its inflation exceed 2 percent to allow deficit countries to re-establish competitiveness without resorting to deflation. And in Japan, a higher rate of inflation coupled with low nominal rates could allow for a gradual reduction in debt to a sustainable level. 

Obvious question: How would these countries get higher inflation, in a world where they're struggling to hit their 2 percent targets? Blanchard suggests a coordinated increase in wages and prices, which is theoretically plausible but probably a heavy lift, practically speaking. 

The State of Advanced Economies and Related Policy Debates: A Fall 2016 Assessment
Published September 2016
Available on the Peterson Institute website

Rain, snow and payrolls

Shoddy May U.S. payroll data might have had a lot to do with weather, based on a new San Francisco Fed economic letter. Looking at real-time weather data along with a model that uses monthly county employment data, the authors conclude that the country would have added 196,000 jobs in May, counting out the effects of bad weather and a Verizon strike, versus the 24,000 reported for the month. 


"May employment growth appeared to be hampered by a kind of double whammy: May’s economic activity was held down by an unusual cold spell, and the warm February and March temperatures pulled some employment forward that normally would have occurred in May," the authors write.

Clearing the Fog: The Effects of Weather on Jobs
Published Oct. 3
Available on the San Francisco Fed website

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