Workers Are Finally Returning To The Labor Force, But Will Wage Gains Follow?

The American worker saw mixed news in the February jobs report released Friday. Employers added an encouraging 242,000 jobs, significantly outpacing expectations, and previous monthly jobs figures were revised upward. But wages fell by 0.1 percent from the month before, an unexpected bit of softening after a strong January for wages.

Deeper in the report, however, were numbers that could prove promising for ordinary workers. The labor force participation rate ticked up for a third month in a row, with 550,000 more workers joining the ranks of the employed or those searching for work, the Bureau of Labor Statistics reported.

In theory, this broad shift of the American working-age populace — from sitting on the sidelines of the workforce to actively seeking and finding work — should push wages up. When companies have a smaller pool of unemployed from which to draw, competition increases, and managers pay more for new employees.

The data have shown a steady diminution in the pool of workers who are unemployed or have given up looking for work. But what matters for wages in the medium term is just how deep that reservoir remains.

Workers Returning

Despite a steadily falling unemployment rate, postrecession wage growth has yet to come anywhere near a healthy level — say, 3.5 percent annual growth, which is half a percentage point above the 20-year average. In February, wages picked up 2.2 percent from the year before.

Orthodox economic theory suggests wage gains could be waiting on a real improvement in the labor force participation rate. After a decadeslong climb in the ranks of the labor force, propelled largely by the entrance of millions of women into the workforce, labor force participation fell from 2000 onward, accelerating sharply during and after the recession. Today it stands around the same level as early 1978.

But there’s some reason to hope the pattern could be reversing, albeit slowly. February marked the first three-month stretch in growing labor force participation since early 2010, and the 1.5 million workers added to the labor force were the most in a three-month period since 2000.

That’s hardly enough to stem the overall losses in the past 15 years, however. Part of that decline has to do with the outsize baby boomer generation beginning to retire from the workforce. But a closer look at the prime-age employment-to-population ratio, which includes only those ages 25 to 54, shows a similar pattern: a yearslong slide followed by a recent uptick.

What’s happening behind these numbers? The data suggest people who had been considered outside the labor force — typically because they were not actively searching for work — have been finding employment at a more rapid clip. In February, some 4.6 million people who had been considered labor “slack” in January found employment.

But there’s a flip side. The increasing volume of labor flowing from the sidelines into the workforce suggests the ranks of the nonworking population could still be quite large.

When can we say that slack has disappeared? That’s anyone’s guess. Suffice to say it hasn’t happened yet. That was the recent message of Federal Reserve Chairwoman Janet Yellen, who told Congress last month slack remains. “While labor market conditions have improved substantially, there is still room for further sustainable improvement,” she said.

Other Drags

All of this depends, of course, on the relationship between labor force participation and wage gains. Historically, the correspondence between the two is a bit imperfect. Moreover, economists have identified other factors weighing on wages that aren’t directly tied to unemployment rates, from globalization to technological shifts. And these long-term trends don’t show any signs of abating.

Workers’ bargaining power, a crucial path to getting higher pay, has declined for decades. Private-sector union membership peaked in the 1950s and the decline has accelerated in the past two decades. Today, less than 11 percent of workers are part of a union that can collectively bargain for higher wages.

Moreover, the jobs that have expanded most are in low-wage, low-skilled sectors as traditionally high-paying blue-collar jobs in manufacturing continue to disappear or move abroad. More than half of the jobs added in February were in low-wage categories, including retail workers, healthcare aides and restaurant workers.

“When more low-skill and low-paying jobs are added to the mix, and people on average work fewer hours, then average earnings decline,” said Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute and a former Department of Labor Chief Economist. “The economy needs more high-skill jobs in order to provide higher wages that fuel consumption.”

The growing prominence of service-sector and low-wage employment in the U.S. has likely helped fuel the notion that, despite the fact that 14 million jobs have returned since 2009, the economy is in a rut — a narrative that has greatly propelled at least one populist presidential candidate this election cycle.