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Unemployment and Wage Increases - 10/21/14

Economists refer to it as a puzzle – why are wages not rising faster given recent declines in unemployment.  Hourly wages in the U.S. private sector actually fell by a penny in September and they’ve expanded at only a 2% rate over the past year.  Some economists believe that official unemployment rate measures do not accurately capture how much slack in the labor force. 

In other words, even though the official unemployment rate in the U.S. is presently 5.9 percent, that figure does not satisfactorily reflect the number of people that are available to supply more effort in the U.S. labor market.  If unemployment continues to decline, the presumption is wage growth will accelerate, but how low does unemployment have to go?  When unemployment gets to be too low, toward what economists call the natural rate of unemployment, inflationary pressures begin to build. 

The Federal Reserve’s current guess is that the natural rate is around 5.2 to 5.5 percent based on historical patterns.  Given current rates of job growth, America could see that level of unemployment sometime next year, which suggests that wage inflation is right around the corner.  Not so fast.  At the end of the Clinton Administration, unemployment fell below 4 percent, and inflation remained low and stable.

Anirban Basu, Chariman Chief Executive Officer of Sage Policy Group (SPG), is one of the Mid-Atlantic region's leading economic consultants. Prior to founding SPG he was Chairman and CEO of Optimal Solutions Group, a company he co-founded and which continues to operate. Anirban has also served as Director of Applied Economics and Senior Economist for RESI, where he used his extensive knowledge of the Mid-Atlantic region to support numerous clients in their strategic decision-making processes. Clients have included the Maryland Department of Transportation, St. Paul Companies, Baltimore Symphony Orchestra Players Committee and the Martin O'Malley mayoral campaign.