Saturday, 6 December 2014

Does the (US) Phillips Curve work in leisure & hospitality?

The US employment data released yesterday are worthy of a short post. The bare bones of the report are that a strong monthly increase in employment and a modest acceleration in wage growth (321,000 jobs, wage growth from 2% to 2.1%, unemployment rate steady at 5.8%) have prompted excited headlines like the FT's... (US Heads for best jobs growth since 1999). The growth rate of employment has picked up from an above-trend 1.95% annual rate to a whopping 1.99% rate. That doesn't really answer anyone's questions about whether falling unemployment will drive wage growth up, or whether the US is going to return to less pathetic rates of productivity growth any time soon for that matter but with some cracking (i.e., low) CPI and PCE inflation likely to turn  up shortly, real incomes are rising in time for Christmas; and a 2% growth rate in unemployment will underpin GDP growth nicely above that in the coming months.

All of this you can read all about to your heart's content elsewhere. What I've been spending more time on is the make-up of the labour market, which has continued to see the strongest employment growth in the lowest-paid sectors, and some of the weakest in the highest-paid sectors. But one thing that was striking in the November data was a further acceleration in wage growth for the lowest-paid of all the sectors - leisure and hospitality. This is a sector where wages average $14.10 per hour, compared to $24.66 for all workers and over $30 in mining, finance and information. But over the last year, wage growth has picked up to 3.75% at this end of the spectrum. I've plotted wage growth in leisure and hospitality, along with overall wage growth and (inverted) the unemployment rate, in the chart below.

The picture tells a simple enough story. The lowest-paid workers in the US saw their pay levels fall in the aftermath of the recession, suffering far worse than the average. And their wage growth (let alone their wage levels) lagged until late last year. But as the unemployment rate has gone on falling, they have started to see pay rises. The Phillips curve for the overall US economy still looks pretty useless - wage growth trending sideways, while unemployment falls - but tightness in the labour market may finally be turning into more cash at the bottom end of the scale. And since those are the people who spend the largest share of any additional income (because they need to), the impact on demand may be greater.

The main causes of weak real wage growth over the last decade (technology, globalisation) would also suggest that a sector where out-sourcing jobs and replacing them with robots are both difficult, should see wages respond to falling supply of workers. So this pattern does nothing to allay longer-term concerns that the policy response to weak demand caused by weak real wage growth, itself due to major structural forces, is ineffective: An orgy of monetary accommodation has sent up asset prices (which do very little to address falling real incomes for low-income families), helped increase the profit share of GDP at the expense of the wage share and fuelled bubble-like pricing in commodities and currencies, many of which are now deflating.

However, for all those long-term, concerns, I can't think of any reason not to cheer on a boost in wage growth for the lowest-paid sector of the (US) economy at last, even if we need to see this filter up to sectors with higher wage rates before it is reflected in faster average wage growth.