June 14, 2017

THE NEW NORMAL? Lousy Pay Raise? That May Be as Good as It Gets.

First, the bad: Unemployment may be at a 16-year low and the economic expansion may be third-longest on record, yet wage growth is miserable, clocking in between 2.5% and 3% for the past year. When unemployment was this low in the late 1990s and the mid-2000s, wages grew 4%.

Now, the worse: If a labor market this tight can’t generate better pay, quite possibly it never will. In Japan and Germany, where unemployment is plumbing generation-lows, wages are moribund. This suggests the problem transcends borders: Minimal corporate pricing power, lackluster productivity growth and an aging workforce have all undercut employers’ ability to pay better.

This threatens to throw a wrench into the Federal Reserve’s plans. It is likely to raise interest rates at its meeting Wednesday and plans to keep doing so gradually over the next two years.

Yet its longstanding assumption that a fully employed economy would eventually nudge prices and wages higher looks shakier by the month.

Our political class is quickly running out of options other than “Get the hell out of my way!” But that’s the one option they’ll never willingly take.

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