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Wages are sore spot on strong February jobs report

The economy added a healthy 295,000 jobs in February and the unemployment rate fell to 5.5 percent — its lowest level since May 2008. Sluggish wage growth marred an otherwise strong jobs report, fueling debate about whether the Federal Reserve will raise rates in June in response to robust job growth or hold off until the fall for a more broad-based recovery to take hold.

Economists surveyed by the Wall Street Journal and Bloomberg had expected the economy to add 235,000 to 240,000 jobs, and many forecasts had this winter’s snowstorms putting a freeze on job growth.

But the Bureau of Labor Statistics’ payroll survey blew those estimates out of the water. (Remember, though, that the margin of error on these figures is quite large.) The BLS’s separate survey of households put job growth at 96,000. The Peterson Institute’s Justin Wolfers, who weighs those two surveys 80-20, respectively, puts real job growth at 255,000 — still higher than forecast — and “better than solid,” he tweeted Friday morning.

The economy has now added an average of 266,000 jobs every month for the past year and an average of 288,000 each month for the past three months. January’s job creation, however, was revised downward by 18,000.

What may not be so encouraging is that the civilian labor force — all those people working and actively looking for work — shrank by 178,000. And 354,000 more people reported not being in the labor force in February. The months-long story we’ve been telling is that baby boomers are dropping out of the labor market into retirement. But prime-age workers are also leaving the labor force because they’re tired of searching unsuccessfully for work. The number of people who said they wanted a job but couldn’t find one increased by 180,000 in February.

Recall that in January, we heralded a slight uptick in the unemployment rate as a sign that discouraged workers were returning to the labor force. February’s decline may just be a leveling out of the prior month’s data.

A closer look at the unemployed population brings some good news about who is out of work and why. Over 10 percent of those unemployed don’t have a job because they decided to leave their jobs, which presumably, they wouldn’t do if they weren’t reasonably confident that they could get another one in this economy.

Our “Solman Scale U7,” which adds to the officially unemployed part-timers looking for full-time work and “discouraged” workers, fell to another low — 13.32 percent — in part because the number of involuntary part-timers decreased by about 150,000.

The major sore spot in the recovery, though, continues to be wages. Average hourly wages for private nonfarm payrolls rose three cents in February — or just 0.1 percent — to $24.78. For non-supervisory and production employees, average hourly earnings remained at $20.80. For the year, average hourly earnings have increased by just 2 percent.

Slow wage growth raises concerns that a sizable proportion of Americans is not yet feeling the recovery. And the strongest job growth in February was in traditionally low-paying sectors — what the BLS calls “accommodation” and “food services and drinking places.”

Mark Zandi, chief economist at Moody’s Analytics, speaking to the New York Times, offered a couple of optimistic notes about the otherwise disconcerting wage news. One theory is that workers are earning less because more experienced workers (boomers) are being replaced by lower-earning new hires. And second, some workers coming back into the labor force are working for less. They may be making less money than their tenured peers or than they would have 10 years ago, but at least some of them are back and working.

Is that enough for the Federal Reserve to act? The central bank already ended its quantitative easing program because of a steadily improving labor market, but it is remaining “patient,” as Janet Yellen reiterated at her January press conference, on raising rates since inflation is still far below the Fed’s 2 percent target. Yes, the economy has received even better jobs news since the Federal Open Market Committee’s January meeting, and that’s led some economists to suggest a June rate hike is still viable. But with February’s near-stagnant wages, there’s no sign of inflation on the horizon. For monetary policy doves, the message to the Fed is clear: delay the rate hike.

Theoretically, a tighter labor market should push wages higher as employers compete for workers. The Fed typically defines “full employment” to be somewhere between 5.2 and 5.5 percent, meaning that from a pure numbers perspective, wages (and inflation) should be rising. But that’s just not happening yet.

In fact, Friday’s report has some economists predicting that the unemployment rate can fall much lower before inflation takes hold.

On Making Sen$e Thursday, economist John Komlos argued that the “natural rate of unemployment” is a concept that shouldn’t even exist. America can do much better, he maintains, than 5.5 percent unemployment.

In her semiannual monetary policy report to Congress last month, Yellen told the Senate Committee on Banking, Housing and Urban Affairs that the economy has not yet achieved “maximum employment” because the numbers of discouraged workers and those marginally attached to the labor force remain elevated, while wage growth “has not picked up” during the recovery. “I believe we have a ways to go,” she told the committee. The FOMC’s next policy meeting is March 17 and 18.

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