Things Are Getting Boomy: The Economy Is Jumping, and Worker Wages Might Soon Follow


I wrote yesterday about the upturn in Wall Street forecasts for second quarter GDP growth. Maybe the first 4% quarter since 2014 (5.2% in Q3). JPMorgan, for example, now estimates “real GDP is expanding at a 4.0% annual rate in Q2, up from our prior estimate of 2.75% and almost twice the 2.2% growth rate experienced in Q1.”

Sounds like welcome news to me.

But I did get some pushback on two fronts. First, a one-off quarter isn’t the same as sustained growth. Agreed. Indeed, there was a span from late 2013 through 2014 when three of four quarters were 4% or higher. Yet growth over the following three years averaged a meh 2.3%. (More on this issue in my blog post and subsequent Tweetstorm.)

Second, faster GDP growth is a lovely topline number, but what about wages? That’s what really matters for American workers. And there might be some good news there, also according to JPMorgan economists Jesse Edgerton and Michael Feroli. In a new note, they first run through some of the various theories as to why wage growth has been so unspectacular despite a low, low unemployment rate, especially over the past year. Now there are broader secular trends — lower trend inflation, slow productivity growth, a decline in the labor share — which have “all come together to lower the trend in nominal wage growth.” Yet one would think the recent decline in unemployment would nudge wage growth significantly higher. Edgerton and Feroli:

These puzzling developments have spawned a variety of new theories to explain the data. Increasing labor market concentration and monopsony power have received much attention, though these long-running trends discussed above seem like a poor candidate to explain what we view as primarily a recent puzzle. Likewise, we see little reason that any remaining shadow labor market slack should suddenly be exerting a larger drag on wages than it did earlier in the recovery. Others have proposed that workers and firms are too chastened by memories of the crisis to risk either giving or demanding wage increases. As forecasters, one possible response to the data and these debates would be to adopt one or more of these theories as a reason to predict that weak wage growth will continue. Another response, however, would be to reject the need for new theories and predict that wages will accelerate from here. After all, just one year of surprises is par for the course for any macroeconomic forecasting model. Making predictions about the future is always difficult, but we tend to find ourselves in the latter camp, thinking that further wage acceleration might indeed be right around the corner.

Note that E&F are skeptical of some of the hot center-left theories out there for explaining slow wage growth. Anyway, they look to Canada to bolster their optimism:

A year ago, the Canadian wage and inflation data were even more puzzling than their US counterparts, with our composite measure of Canadian compensation running at a dismal 1.7%oya through July 2017 despite low unemployment. Then the data turned rapidly beginning in September, and our composite measure is now up 3.5%oya, an acceleration of 1.8% pts in just six months (Figure 6). Unit labor costs are up a firm 2.6%, and risks to the Canadian inflation outlook are drifting to the upside of the Bank of Canada’s 2% target. Of course, naysayers could point to the Japanese experience of persistently weak wage growth in the face of low unemployment as an example of downside risk to the wage outlook. But Canada is likely a better comparison for the US, and our friendly neighbors to the north remind us that a sharp upturn in wage pressure at this stage in the expansion is also quite possible.

Faster wage growth would be another welcome development, one with as many political implications as economic.

Published in Economics
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  1. James Gawron Inactive
    James Gawron


    Let’s face it there simply is no comparing the Obama economy to the Trump economy. …hmmmm…what if we really tried? What could we use as symbols of both economies?

    First, Obamanomics



    Next, Trumpcatallactics



    So we’re talking 1.5% growth v. 4.5% growth. Say no more.



    • #1
  2. Fake John/Jane Galt Coolidge
    Fake John/Jane Galt

    Investigate Trump, Impeach Trump, Blue Wave, etc.   why should anybody have faith in the economy?  The Democrats and a significant amount of the GOP want to tear down the administration that has laid the small golden eggs.  The Dems are even saying they prefer a trashed economy to a Trump economy.  Doesn’t help the old animal spirits.

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  3. I Walton Member
    I Walton

    How much of the expansion is in high tech where international competition can’t be ignored so it’s very difficult to raise wages?  How much is because of lack of wage growth in big and little box retail where on line competition can’t be ignored so wages can’t be raised?  I see help wanted ads in every retail establishment I visit even though it’s supposed to be shrinking.    I see significant investment locally  because of low land costs in rust belt areas where vast warehousing is being built but there will be little employment generated and ultimately some lost.    I doubt we want a lot of wage growth now, perhaps we should be expanding the work force by cutting welfare, eliminating minimum wages so there can be on the job training for marginal workers and passing right to work laws in case some unions  still suppress hiring, work and investment?  Replacing political correct courses in our secondary schools with what we used to call shop and with work training i.e.  a lot less government and more freedom everywhere.  The data have to be radically broken down to eliminate as many averages as possible in order to know what is actually happening.  

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  4. Mike H Coolidge
    Mike H

    What’s the point of wage growth if it’s going to be eaten by higher prices?

    People’s take home pay might not be changing much, but they’re total compensation has been increasing steadily. It’s just that businesses have been incentivized to give increases in compensation in the form of tax advantaged benefits like retirement contributions, health and life insurance, paid vacation and other leave.

    Take home pay might be preferable to individuals in a lot of cases, but the government is disincentivizing it with the tax law.

    • #4
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