Jobs are plentiful. Will wages rise too?

Russell Price, Sr. Economist, Ameriprise Financial

Unemployment rate drop

July 2018

Key Points

  • The U.S. labor market is becoming increasingly tight
  • This could lead to higher wages for employees, but is putting a strain on employers
  • A low unemployment rate may be the “new normal”

The U.S. unemployment rate dropped to 3.8% in May according to the Labor Department, a level last seen in 2000. In June, the unemployment rate rose slightly to 4.0%. We forecast the rate should end 2018 at approximately 3.6%. If achieved, it would be the lowest U.S. unemployment rate since 1968.

A strong job market is something we all aspire to see. Employment is the primary source of funds most of us need to live our lives. Even if retired, a strong job market alleviates the stress of worrying about job prospects for younger family members. Money may not buy happiness, but a steady source of it can certainly relieve a lot of stress.

The U.S. unemployment rate dropped to 3.8% in May according to the Labor Department, a level last seen in 2000.

Is the job market too strong?

If you run a business, however, your view on the strong job market may not be so rosy. Many businesses are finding it increasingly difficult to attract the workers they need to keep up with customer demands. Trucking, construction and skilled trades are among the most prominent industries reporting significant and growing worker shortages.  

In May, there were 6.7 million job openings across the U.S. economy, according to the Labor Department. For the first time since the Labor Department began measuring this data in 2000, there are more job openings than the total number of people unemployed.

How to attract workers? Higher wages

Over time, businesses will find it necessary to offer higher pay to attract the workers they need. The rate of wage growth has improved over the last several years, but the gains have been modest. Typically, we would expect wages to rise faster given such a low unemployment rate.

There are several reasons for a slower rate of wage growth:

  • Growing number of workers reaching retirement (i.e., workers typically at the upper-end of the pay scale)
  • Reduced labor mobility
  • Employees’ lingering reluctance to change jobs given the frightful job market experienced during the financial crisis

Stronger wage growth would certainly be welcomed by workers and offer a boost to aggregate consumer spending power. But it could also fuel inflation, offsetting some of the benefits of higher pay. Though we expect inflation to run a bit “hotter” over the next year or two, we believe income gains for individuals should help overcome any increase in consumer prices.

Low unemployment levels may be the new norm 

Absent periodic economic downturns, the U.S. unemployment rate is likely to remain lower than its historical averages going forward. Historically, an unemployment rate of 5% has been defined as “full employment,” but we may settle in at a lower level.

A growing percentage of the population is simply moving into their retirement years thereby leaving a smaller portion of the population available to produce the goods and services the economy demands. An extreme example of this phenomenon is Japan, where economic growth is hard to come-by, yet the unemployment rate is just 2.5%.1

Absent periodic economic downturns, the U.S. unemployment rate is likely to remain lower than its historical averages going forward.

The job market and economic outlook

For the first time since the recession ended in mid-2009, the U.S. economy faces legitimate inflation pressures. Stronger wage growth, however, should allow consumers to maintain their level of spending and purchasing power. Nevertheless, higher labor costs could cut into corporate profit margins and lead Federal Reserve officials to raise interest rates at a faster than expected pace. 

As always, this transition period, whereby markets are adjusting to full-employment and rising inflation pressures, is a good time to talk with your financial advisor to help ensure your portfolio is properly positioned for potential changes in market conditions.

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