It’s a head-scratcher for many economists and a headache for Federal Reserve policy makers trying to decide if they should continue with gradual interest-rates increases.
Over the last 12 months, the U.S. economy has created more than 2 million new jobs, pushing unemployment down to 4.3 percent, yet average hourly earnings moved up just 2.5 percent. That’s helped hold down overall inflation, which has lingered below the Fed’s 2 percent target for nearly all of the past five years.
Fresh research from the San Francisco Fed provides an explanation: baby boomers. As they retire in droves, their exit from the workforce is distorting the data for average earnings, according to a blog post published Monday on the bank’s website.
“Wage growth isn’t as disappointing as it looks,” Mary Daly, director of economic research at the San Francisco Fed, said in an interview. “Wage growth, when cleaned up, looks consistent with other measures seen in the labor market.”
Low inflation has allowed the Fed to raise rates very slowly -- just four times since December 2015 -- with one more quarter-point hike projected by the end of the year.
The paper expands on preliminary research, published in 2016 by Daly and her colleagues, Bart Hobijn and Benjamin Pyle, suggesting a connection between retiring baby boomers and sluggish wages. The big surprise this time for Daly was the persistence of the impact.
“I’d expected the effects to start to wane,” she said. “The piece that’s most substantive is the fact that it keeps going.”
The research isolates wage growth for people who remain in the full-time work force from year to year, as measured by median weekly earnings. That’s currently on par with earnings growth seen at the previous economic peak, in 2007. It then breaks down the impact of people moving into and out of full-time employment.
The baby-boomer cohort, who are reaching age 65 at a pace of about 10,000 every day, dominate the groups who are exiting the labor market and are leaving behind relatively high levels of pay. They’re being replaced, meanwhile, by young people leaving school, part-timers moving into full-time positions and thousands who lost work and gave up looking for a new job at some point during the recession and the long, slow recovery.
“The vast majority of these new workers earn less than the typical full-time employee, so their entry brings down the average wage,” the authors wrote. “Counterintuitively, this means that strong job growth can pull average wages in the economy down and slow the pace of wage growth.”
Daly said the overall exchange of new workers for new retirees is holding earnings down by a little under 2 percentage points.
The phenomenon of richly paid retirees being replaced by more poorly paid workers is always occurring, Daly added, but the impact of the baby boomer generation, because of its size, is about double the historical average.
Median weekly earnings actually rose in the second quarter to 4.2 percent, on an annual basis, according to the U.S. Department of Labor. That’s the fastest pace since 2007. Adjust for baby boomers and that would rise to 5.2 percent.
“This is not a signal that labor market is weak,” she said.
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