The jobs report that was released by the Department of Labor on December 6 showed a blowout number of new jobs created and a falling unemployment rate. Normally, you would generally think that competition for workers would result in rapidly expanding paychecks. However, the government also reported that wage growth, while higher than it was in the middle of the decade, has leveled off recently. Workers are understandably wondering why their paycheck is growing more slowly than it was earlier in the year. However, there are a number of factors that lead to the conclusion that this is not necessarily a bad thing.
One of the first things that you should know about wage growth is that it generally lags behind other economic indicators. In other words, wages are one of the last things to go up when there is a period of economic strength. Similarly, if there is an economic slowdown, it will take some time to make its way through to the average paycheck. Therefore, when an economy is coming out of a recession, it may take a year or two for you to start getting a decent raise.
Why Wage Growth Has Slowed
While job growth seems strong today, the economy has recently begun to slow down considerably from its higher growth in 2017 and 2018. The Federal Reserve had been trying to tap the brakes on economic growth in order to curtail inflation and raised interest rates several times last year to slow down the economy. These interest rates hikes have worked and economic growth and other indicators have shown that the economy is growing more slowly than it was in the past. As a result, the Fed has had to cut rates in order to avoid a recession. In addition, productivity across the economy has dropped as the economy has slowed, and this also has a dampening effect on wage growth.
Another factor causing wage growth to stall is the uncertainty caused by the trade war with China. Exports to that country have decreased while businesses are being forced to shoulder the costs of tariffs that they cannot pass on to consumers. As a result, they have less money to pay their employees.
While you may have seen a strong jobs number today, wages are still reflecting the economic weakness that had begun to show itself last year. We will likely need several months of blowout job numbers in order for wage growth to pick up again.
You Do Not Want Too Much of a Raise
The ironic thing is that, while everyone celebrates wage growth, it is usually this factor that causes the Fed to raise rates. This is the proverbial taking away of the punch bowl. When paychecks grow too much, it is usually a bad sign because that means that inflation is on the way. In other words, you want your paycheck to go up, but not by too much because your raise will mean that you have to pay more for the necessities of life. Right now, while workers may be bemoaning paychecks that have not grown as quickly as they would like, inflation has leveled off below two percent and paychecks are growing noticeably faster than the rate of inflation. As wage growth goes north past three percent, there is more of a chance that inflation would increase.
Stated simply you want a Goldilocks pay raise. Too much can really be a bad thing because there are harmful effects when wages increase too much. While you may want a four percent annual raise, if everyone gets this increase, things will start to cost you more. Steady and moderate pay increases are actually what is best for the average worker so long as they outstrip inflation.
Your Boss' Raise Is Not as Large
Right now, this is actually an economy where there are winners and losers. Believe it or not, your boss' paycheck is likely not growing as quickly as yours. Interestingly enough, non-supervisory workers have seen their wages increase at double the rate of supervisory workers recently. The slowing economy has impacted managers' paychecks, but it has not yet made a dent in those of workers. For now, companies are struggling to fill workers' jobs but have more of a steady supply of managers. This is the exact opposite of what generally tends to happen when it comes to wage growth as regular workers are the last to see higher paychecks.
