Gene Epstein of Barron’s asserts in his latest column that wage growth is poised to accelerate.
… [H]ow tight, really, has been the inverse correlation between joblessness and wage growth? … In fact, the correlation hasn’t been tight, but quite loose. So the whole premise of the question posed by Yellen and others turns out be a red herring.
MIGHT IT JUST BE THAT THE RECENT behavior of labor compensation is not anomalous at all, but can be explained by variables drawn from prior decades? According to economist Jason Benderly of Applied Global Macro Research, the answer is yes.
Benderly has built an explanatory model that accounts for fluctuations in labor compensation with a far closer fit than a single-variable model that consists solely of the change in the unemployment rate. While the change in the jobless rate is one of the explanatory variables, another, separate variable is the actual level of that rate, with both operating as leading indicators of the change in compensation.
So it not only matters by how much the unemployment rate has declined; the level from which those declines have occurred — quite high over the recent period — matters about as much.
Also important are two other variables: the change in labor productivity, and after-tax profit margins. The greater the productivity growth, the greater the wage gain, with this variable operating as a coincident indicator on compensation. And because higher profit margins mean that companies make greater investments in their workers, this variable is positive for wage gains, and operates as a leading indicator.
These four key variables, along with two other, minor ones relating to prices, explain real hourly compensation, which includes all benefits, going back to 1960. With no trouble explaining the recent period, the model predicts an acceleration in wage growth. Recent slow gains should not be an excuse for the Fed to delay hiking interest rates.
