A number of the members of the Federal Reserve’s Federal Open Market Committee (FOMC) have shifted their focus from worrying about job creation (which has been stronger than their expectations) to hourly wage growth (which has been weaker than their expectations). Indeed, 1.7 percent year on year growth for 2014 in average hourly earnings has led to much hand-wringing. It shouldn’t have. Lost in the news media’s focus on the nattering nabobs of negativity, there are seven pieces of excellent news for the economy from labor market developments, as follows:
- The average number of hours worked increased from 34.3 in December 2013 to 34.6 in December 2014, a rise of 0.9 percent.
- Average worker’s overall income rose by 2.6 percent, when one puts it all together despite average hourly earnings not growing very much.
- Total labor income in the US rose at the strongest pace since 2007.
- Since inflation finished 2014 at 0.8 percent, according to the consumer price index. This implies real income growth of 1.8% over the course of the year.
- The number of workers grew by 2.1 percent in 2014, the most rapid pace of expansion since 1999.
- When one adds the 2.6 percent nominal growth in individual earnings to the 2.1 percent growth in employment, one finds a 4.7% growth in total labor income (Figure 1).
- This all equates to 3.9 percent real growth in total labor income, the best in many years.
Data for bullet points 1-5 are from the Bureau of Labor Statistics.
Some of the boost to the real growth comes, of course, from the collapse in oil prices. Even if one used core inflation rather than headline inflation to discount the improvement in total labor income, the number would still come in close to 3 percent, which is quite respectable.
These numbers are even more impressive given that levels of household debt did not change dramatically in 2014. Consumer loans did rise, including auto loans but mortgage lending grew at a very slow pace. This is indicative of a much more healthy and sustainable expansion that the 2003-2007 episode.