Waiting for Wage Growth

The December jobs report capped a banner year for the US labor market. As compared to a year earlier, public and private employers added just short of 3 million net new jobs, the best showing since 1999.  Private sector employment accounted for a disproportionate 97 percent of the net increase for the year and 95 percent of the increase over the last month. Professional and business services, which masks a very wide range of activities, posted a healthy increase in December, as did education and health services, and leisure and hospitality. Financial activities remains a laggard, trailing the broader employment recovery and still short of its pre-crisis peak.

The unemployment rate, a dubious measure of labor market health, nonetheless declined by 110 basis points over the year. At 5.6 percent, the unemployment rate is well below the 6.5 percent monetary policy threshold announced by the Fed two years ago. Alternative measures of unemployment, running the technical gamut from U-1 through U-6, all declined, as well. While it offers an incomplete picture of market conditions, the conventional measure of unemployment does convey that the rationale for unconventional monetary policy has largely dissipated. A second-quarter increase in the fed funds rate looks more likely.

While there is plenty to cheer in the latest jobs report, the gains remain qualified. Of greatest concern, earnings slipped from a month earlier, frustrating expectations of a long-awaited improvement in this weak link of the recovery. Will the wage story turn in 2015? Baseline forecasts for the labor market over the next year suggest sustained improvements in the pace of hiring; as the market for moderately-skilled workers tightens, healthier wage gains should follow.

Some key trends in pictures:

Measured by a simple count, we have recovered all of the jobs lost during the downturn. Not every sector is performing as well, however. Financial activities remains a laggard, thus far only recovering half the jobs lost in its peak-to-trough cycle.

The pace of employment gains increased in 2014, catching up to the previous expansion's peak rate but short of the maximal year-over-year gains registered during the 1980s and 1990s.

The conventional unemployment rate is well below the policy guidepost of 6.5 percent offered up two years ago. Alternative measures of unemployment show we have some way to go. In the following chart, a broader tally shows an unemployment rate that is still above its peak level during the prior cycle.

The labor participation rate has shown no signs of an inflexion. Demographics explain the trend in part but not in full. Participation amongst prime working-age Americans, between 25 and 54, is barely above its recent low-point.

Stagnant earnings remain the most nettlesome aspect of the job market recovery. Earnings have been growing at a year-over-year rate of about 2 percent. Instead of improving in the final months of 2014, the pace slowed. In the baseline analysis, we should see stronger earnings growth in 2015.