Are wage hikes starting to pep up the 'no-raise recovery'?

An uptick in job creation was accompanied in May by something else every bit as welcome: a pop in wages.

Earnings rose by 8 cents to $24.96 an hour for private-sector employees, the Labor Department reported Friday. The news came alongside additions of 280,000 new jobs on US payrolls – a welcome sign the economy may be starting to shake off weak performance early this year.

And although the unemployment rate ticked up a notch to 5.5 percent, it was for a promising reason: More people are being drawn off the sidelines to look for work.

The rise in wages may be the best news of all. The 8-cent gain is faster than the recent pace of inflation, stronger than any monthly rise since January, and twice the average gain over the past 12 months.

Wage gains have been a nagging no-show in a six-year-economic recovery. Even before the financial crisis of 2008, stagnant pay had been a persistent feature of the US economy.

So May's positive news is just a start down the road to a wage recovery. There's room for policy debate ahead over how to help household incomes grow more solidly over the longer term. 

That caveat aside, some economists think a corner is being turned.

“Wage growth is picking up, and will continue to do so as labor market slack dissipates,” predicts Gregory Daco, lead US economist at Oxford Economics, in a comment for clients Friday.

The issue of so-called “slack” may be the key for the near term – both to why wages have disappointed since the recession and to why more improvement may be on the horizon.

Typically, wages pick up when a labor market tightens, and employers need to compete to find capable workers. But the depth of the recession in 2007 to 2009 wiped out so many jobs that it’s taking longer than usual for such a tightening to occur.

Even six years in, the recovery’s current 5.5 percent unemployment rate is deceptive. By some estimates, several million workers, who are not actively looking for jobs and are not counted as unemployed, may reenter the labor force in a stronger job market.

But at least some tightening has happened already, economists say. That helps to explain why some of America’s largest employers – including Wal-Mart and McDonald’s – have announced pay hikes in recent months. Less slack can mean more employees jump ship and it gets harder to replace them with workers of the same quality.

Other factors are also important: Notably, states and some large cities have been raising their minimum wages, and low-wage companies like McDonald’s have been confronted with a public “Fight for $15” campaign by workers and labor allies, as well as by overall job-market conditions.

An analysis by economists at the investment firm Goldman Sachs found pay raises have become stronger in low-wage industries than in other parts of the economy over the past year. Partly this is just a “catchup” trend for sectors like retail that had lagged behind on pay, and the reasons include that the minimum wage hikes are “disproportionately benefiting wages at the lower end of the pay scale.”

As of this year, for the first time ever, more than half of US states have base-level wages above the federal minimum of $7.25 an hour. The report concluded that the “state-specific minimum wage hikes in 2015 might boost [hourly earnings] by about one-tenth of a percentage point directly, and perhaps a bit more by raising the wages of workers near the minimum wage.”

Moreover, firms like Wal-Mart may be worried about the risk of damage to their corporate reputations if they’re labeled as living-wage laggards.

But if wages may finally be on the rise, even at the low end, it’s important to keep the context in view.

Since the 1970s, average weekly earnings have stalled out, on an inflation-adjusted basis, for workers in the bottom quarter of the pay spectrum. In the middle of the spectrum, weekly earnings have grown but only modestly, from $733 per week back then to $791 in 2014. That amounts to well below half a percent growth per year.

The long-term causes include global competition in the labor market and declining union bargaining power, many economists say.

What can be done to bend the arc upward?

The biggest solution is simply strong economic growth – with an emphasis on more high- and middle-skill jobs rather than low-wage ones. This could include corporate tax reform that draws more investment “onshore” and better job training.

The problem, by the way, isn’t that the US is only creating low-wage jobs. An analysis by the liberal Economic Policy Institute found that over the past year, the economy has been adding high-, low-, and middle-wage jobs “in proportion to the rate that those jobs already exist in the economy.”

Many economists believe that minimum-wage hikes can be part of the answer for low-income families struggling to pay their bills – with the income benefits outweighing some reduction in hiring when the wage is raised. 

It’s not a one-step panacea for the job market. Recent government data on state economies bear this out. Some states that have had higher-than-federal minimum wages in place since 2012 have seen above average growth in worker earnings between 2012 and 2014. But those states (Oregon and Washington) are balanced by others (California, Connecticut, Illinois) that have underperformed on both wages and joblessness.

Still, policies like the minimum wage can help address what many Americans sees as an important problem: the widening gap between the well off and people of low or middle income levels. Other ideas could address this gap while also potentially expanding the number of people who can find jobs. Targeted wage subsidies, for example, could give employers an incentive to hire more people (with the government covering part of the paycheck to ensure a decent wage).

Investing more in infrastructure could be a double win. The US would employ more people now, and reap the job-amplifying benefits of better roads, transit systems, or schools.

Another key question, raised by Friday’s job numbers, is Federal Reserve policy. Some economists say the Fed could start raising interest rates as early as September, to ensure that inflationary pressures don’t build in the economy. But both within the central bank and outside, others say that inflation remains below the Fed’s 2 percent annual target and that there’s still plenty of slack left in the job market. In that view, the priority should be on keeping interest rates low and seeking full employment for the economy – with the better wages those policies can bring.