Real Wages Crash, Destroying the Idea that We’re in a Labor Shortage

Question: How can you tell if an employer is lying?

Answer: He tells you he cannot find workers to fill jobs at his company.

Unemployment is very low. There have officially been more job openings in the U.S. than unemployed workers for three consecutive months. And businesses have been telling anyone who would listen—including Federal Reserve officials—that they cannot find enough workers.

The argument that the U.S. is experiencing a labor shortage, however, does not match wage data. Average hourly earnings were 2.7 percent higher in July compared with a year ago, according to data released Friday.  Average weekly earnings rose 3 percent.

Nearly all of those gains were wiped out by rising prices. After adjusting for inflation, average weekly earnings fell 0.2 percent in July compared with the prior month and were close to flat for the year. Inflation adjusted average hourly earnings were unchanged for the month. Compared with a year ago, inflation adjusted hourly earnings fell two cents.

Core inflation—which excludes volatile food and energy prices—rose at its fastest pace in nearly a decade. The Consumer Price Index rose 0.2 percent month over month for an annual gain of 2.4 percent.

The lack of wage gains despite a roaring economy is regarded by many economists as a conundrum. Whatever its cause, however, it indicates that cries of labor shortages are implausible. If employers were desperate for workers, they would surely be bidding up the price of labor.

“These people are out there in large numbers, they just happen to be working elsewhere. But there is a way to get workers to change employers: offer them higher pay,” Dean Baker of the Center for Economic and Policy Research recently wrote.

The latest wage data could have policy implications in Washington, where Republican lawmakers have been crafting legislation to expand programs allowing U.S. employers to import foreign workers. If wages of U.S. workers are flat or falling, increasing the supply of workers is hard to justify.