These might be the two most important questions about the U.S. economy: Are more people working? And are they making more money?
There are some common and well-understood answers to those questions. First, one could easily argue that the U.S. is in the midst of a historic job recovery. With the most consecutive months of private-sector job growth in history, this is, to honor the beginning of baseball season, truly a DiMaggio Economy. Even better, the job growth in the last three months has, by one measure, been the strongest of any quarter-year since 1983. The entire recovery has been in full-time work. Surely, the economy is working its way back to normal.
Meanwhile, it’s clear that wages aren’t enjoying the same renaissance. Despite a recent uptick in wage growth, average hourly earnings have been somewhat stuck in the last few years. This is perplexing, even to the wisest U.S. economists. “I’m somewhat surprised that we’re not seeing more of a pickup in wage growth,” Federal Reserve Chair Janet Yellen admitted in a press conference just three weeks ago.
But several studies from just the past few weeks suggest that both of these stories—that the labor market is basically back to normal and that wages aren’t rising for workers—might be slightly misleading, or even significantly off-base.
Let’s start with the first storyline: That the economy is returning to normal, as the labor force is on a historic streak of creating full-time jobs. There is some evidence that the nature of work—and the relationship between employers and employees—is undergoing a major shift that is more complicated than the “return to normal” narrative.
For several years, economists wondered whether freelancers or on-demand jobs, like Uber drivers, were growing. It was hard to know for sure, because the Bureau of Labor Statistics hasn’t conducted a proper survey on it since 2005. So, economists Lawrence Katz and Alan Krueger did their own.
They discovered that the on-demand “Uber” economy is still puny. But something bigger is happening. A larger category of “alternative” work has exploded, with contractors and temp workers—like home health aides, truck drivers, and call center workers—who often face unpredictable schedules and lack benefits like health insurance or a retirement package. Between 2005 and 2015, the economy witnessed a 66 percent increase in the number of workers in these "alternative” arrangements. Over the same period, the number of standard full-time jobs actually declined slightly.
For many workers, these flexible arrangements are ideal. But they don’t represent the old normal of “full-time work.” They represent a new normal of “full-time work-seeking,” where millions of people who used to work for companies with benefits now have to stitch together their own safety net.
This doesn’t make the old story wrong, just incomplete. Maybe the economy isn’t reverting back to 2006. Maybe it’s adding full-time workers and redefining the nature of full-time work at the same time.
Now onto the wage question. The big story of the past few years is that average wage growth has been disappointing, given all the full-time jobs the economy is creating. But it’s possible that wages are growing, just in ways that economists are missing by focusing on the word average.
Imagine a company, Cars Inc., with two groups of workers: Rich old workers who design cars, and cheap young workers who sell cars. In the recession, consumers want fewer cars. So the company lays off its cheap young employees. This creates an interesting scenario: The company is paying a high average wage, but only because it’s fired the cheap workers.
Then the recession ends, and people want cars, again. Cars Inc offers raises to its designers. But also, it hires back more salespeople at low wages. That’s a good thing, right? Everybody at Cars Inc is making more money than they used to! But average wages don’t rise very much, because all these cheap hires offset the raises for richer designers. After a few years, the rich workers retire. What happens when the highest wages are taken off the books? Again, it depresses the growth of average wages at the company.
This is a simplistic allegory. But perhaps it’s not so far from what’s happened in the U.S. economy. Firms laid off cheap workers when the recession hit. That kept average wages up. Then they hired back cheap workers when the recession ended. That kept average wages from growing. The massive Boomer generation is beginning to leave the labor force. That, too, depresses average wage growth.
This suggests that if an economist only studied continuously employed workers—the ones who weren’t laid off after the recession—she would see significantly more wage growth at the individual level. In fact, the Federal Reserve Bank of Atlanta’s Wage Growth Tracker follows precisely that. In 2014 and 2015, it saw this individual measure of wage growth grow faster average hourly earnings. In a paper last month, researchers at the San Francisco Fed said the wage mystery wasn’t much of a mystery at all. “Wages are consistent with a strong labor market that is drawing low-wage workers into full-time employment,” they wrote.
There are two takeaways. First, the economy is undergoing shifts—including in the nature of work and in the composition of the workforce—that make it difficult to see the economy in perfect detail. One big-picture explanation is that labor market is adding workers with DiMaggioesque consistency and many people are seeing rising real wages; yet its addition of low-wage and contracting jobs, combined with the retirement of older rich workers, is depressing overall wage growth.
The second takeaway is a bit more abstract. There is a journalistic imperative to proclaim absolute certainty about important issues. But certainty requires a perfect ability to measure stuff. In economics, that level of perfection is elusive. By analogy, there is no one machine that provides a perfect glimpse of the inside of a human body. An X-Ray sees the bones but overlooks the soft tissue; an MRI sees the soft tissue but misses the chemical activity; and a PET scan can see metabolic activity but misses what’s going on in the bones. The same is often true for economic measures. They do their own jobs well. But they don’t do every job well. For that reason, it can take a while for the full story of the economy to come into perfect focus.
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