Seven Overlooked Labor Market Bright Spots

Market Suggests Strong Economy Despite Slow Wage Growth

A number of the Federal Reserve’s Federal Open Market Committee (FOMC) members have shifted their focus from worrying about job creation (which has been stronger than their expectations) to hourly wage growth (which has fallen short of their expectations). Indeed, 1.7% year-on-year growth for 2014 in average hourly earnings has led to much handwringing. It should not have. Overshadowed by the lackluster growth in hourly wages are seven excellent economic factors emanating from labor market developments, namely:

  • The average number of hours worked increased from 34.3 in December 2013 to 34.6 in December 2014, a rise of 0.9%.
  • Average worker’s overall income rose by 2.6%, when one puts it all together, despite average hourly earnings not growing very much.
  • Total labor income in the US rose at the strongest pace since 2007.
  • Inflation finished 2014 at 0.8%, according to the consumer price index. This implies real income growth of 1.8% over the course of the year.
  • The number of workers grew by 2.1% in 2014, the most rapid pace of expansion since 1999.
  • When one adds the 2.6% nominal growth in individual earnings to the 2.1% growth in employment, one finds a 4.7% growth in total labor income (Figure 1).
  • This all equates to 3.9% real growth in total labor income, the best in many years (Figure 2).

Data for bullet points 1-5 are from the Bureau of Labor Statistics. 

Some of the boost to the real growth comes, of course, from the collapse in oil prices. Even if one used core inflation rather than headline inflation to discount the improvement in total labor income, the number would still come in close to 3%, which is quite respectable. 

These numbers are even more impressive given that levels of household debt did not change dramatically in 2014. Consumer loans did rise, including auto loans, but mortgage lending grew at a very slow pace. This is indicative of a much more healthy and sustainable expansion than during the 2003-2007 episode. 

Figure 1: Total Labor Income = Ave. Hourly Earnings x Ave. Hours Worked x # of Worker 

Figure 2: Real Growth in Total Labor Income is Soaring

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.