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The U.S. Recovery Finally Pays Off for Workers

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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Remember the "jobless recovery"? Even when the unemployment rate was falling -- to 8.8 percent in October 2011 from 10 percent in October 2009 -- we couldn't cheer because mostly it did not signify people getting jobs: It signified people giving up on the labor market by going on disability or retiring.

Unemployed Workers Leaving the Labor Force
 
Source: Bureau of Labor Statistics

And when the jobless rate had dipped down to 5 percent by October 2015, even that was not an unalloyed relief, because wage growth was sluggish, as you would expect given the population of "shadow unemployed workers" who had dropped out of the labor force and were likely to re-enter.

Hourly Earnings Growth
Change from year earlier, for production and nonsupervisory employees.
 
Source: Bureau of Labor Statistics

It looked like the job market might be breaking out in 2014, but then the dollar surged, oil crashed, and the industrial sector fell into recession, a new headwind from which we are just now emerging.

After six years of phantom pseudo-recovery, the job market finally gets some good news without an asterisk. Wage growth is accelerating -- up more than 3.5 percent over the past year, according to the Atlanta Fed's Wage Growth Tracker. While the unemployment rate has barely fallen, from 5 percent to 4.9 percent over the past nine months, the percentage of people 25 to 54 who were gainfully employed has increased from 77.2 percent to 78.0 percent as higher wage growth draws people back into the work force. Older workers continue to stick around, with employment growth among people over 54 up by a million over the past year. Even teens are finding jobs, a sign of the intense demand for workers.

Teenage Employment Rate
Change from year earlier, for workers 16 to 19 years old.
 
Source: Bureau of Labor Statistics

One piece of bad news for the economy this week -- continued poor productivity growth -- is actually great news for the labor market and investment growth outlook. Accelerating wage growth and slowing growth in productivity are an unsustainable situation for corporate America. That combination would wreck profit margins, as it implies companies are paying more and more for workers producing less and less. Companies must invest in new equipment and research to shift spending away from increasingly expensive workers toward other factors of production that are cheaper. This should increase productivity in the future.

At the same time, a tighter job market, higher wage growth and increased labor-force participation are great for consumer spending in the short term. If it lasts, the combination could give recession-scarred younger workers the confidence to buy houses and start families.

Companies spending more on workers and investment. Workers spending their higher incomes on houses and cars. This is how the U.S. economy used to work.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Conor Sen at csen9@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net