Unemployment is down to 4.9 percent. So why are wages rising so slowly?

The U.S. economy added 151,000 jobs in January — short of economists’ forecasts of about 190,000 — and the unemployment rate inched down to 4.9 percent, according to the Bureau of Labor Statistics.

November jobs numbers were revised up, but December jobs were revised down, resulting essentially in a wash: 2,000 fewer jobs added than previously reported.

“Certainly the headline number is disappointing. It’s out of keeping with what we had seen in December, November and October,” said Michael Strain of the conservative American Enterprise Institute. “We hoped it’d be a sustained 250,000. Having said that, it’s just one month.”

But despite January’s less-than-stellar jobs numbers, wages were a relative bright spot (finally). After average hourly earnings fell 1 cent in December, earnings rose 12 cents in January. In the past year, average hourly earnings have risen by 2.5 percent. Economists and policymakers were hopeful:

Dean Baker, co-director of the progressive Center for Economic and Policy Research, agrees with Strain about not putting too much stock in any one month’s numbers.

“The monthly numbers I always immediately ignore,” Baker said. Instead, he takes an average over the last three months and compares that to the prior three months in order to remove some of the noise from the data. When it comes to wage growth, that number — 2.45 percent — is right on target with the 2.5 percent rise we’ve seen over the year. Wages are moving slowly, and certainly not on the pace you’d expect with 4.9 percent unemployment.

“I’d like to see wage growth at 3 and 3.5 percent,” Baker said. “We had this big redistribution from wages to profits in the downturn…Workers should be getting some of the ground back that they lost in downturn.”

“This is kind of the great puzzle,” Strain said. “We’re getting a little more evidence of it every month: We can add jobs and unemployment can drop without sparking an increase in wage and price inflation, but at some point we are going to see it.”

The question is: How much slack is left in the labor market?  In an economy with full employment, employers have to offer higher wages to attract and retain workers. The fact that wages haven’t budged suggests that there are plenty of people still on the sidelines, waiting to jump into the workforce.

And in fact, the labor force participation rate is near a four-decade low. However, the labor force participation rate did climb .1 percent to 62.7 percent in January. While that’s not much, at least it didn’t fall — something President Obama pointed out in today’s press conference on the economy. And the participation rate has, in fact, climbed in the past four months to economists’ delight:

Take a look at the graph below from the Federal Reserve Bank of St. Louis to get a big-picture look at the labor force participation rate and then zoom in to see what’s happened in the last four months.

But the participation rate for prime-age workers — those workers between age 25 and 54 — is what we should really be looking at, says Baker. After all, it’s not surprising to see the number of people working in their 60s drop off, especially as 10,000 baby boomers hit retirement age every day.

“If we look at labor force of prime-age workers, it’s not quite as bad,” Baker said. The prime-age employment-to-population sits at 77.7 percent. “We’re still down 3 percentage points, and there’s no good explanation for that other than a weak labor market.”

The following graph of the prime-age labor participation tells a happier story. The prime-age employment-to-population has regained about half of its losses since it bottomed out during the recession.

So as President Obama said in his press conference earlier today, where he touted the U.S. economy’s continuing recovery, “We should feel good about the progress we’ve made, understanding that we’ve still got more work to do.”