Tomorrow, we may get the latest evidence that the jobs market continues to slowly improve when the Labor Department releases its weekly jobless claims report. Yet despite an improving labor market, household spending isn’t picking up enough to fuel a faster recovery.
Why? As I write in my new Market Perspectives paper, Wage Woes, the big missing ingredient is a lack of real income growth. In other words, an improving jobs market isn’t translating into higher wages for the vast majority of the population, meaning very few can get a raise.
Now, how bad is it? Well, if you look over the last 50 or 60 years, household income typically has risen by about 3.5% annually after inflation, fueling a 3.5% or so gain in consumption. However, since the recession ended three years ago, we’ve seen household income gains roughly half of that. And this year, things are even worse. For 2013, real, or inflation-adjusted, household income growth is averaging only about 1%.
There are short- and long-term factors to blame.
Short term: In the short term, one major factor behind the muted wage growth is ongoing political and fiscal uncertainty in Washington. Even though fewer companies are laying employees off now than during the last recession, the pace of hiring isn’t as great as it would have been if there was more stability in Washington. And if hiring doesn’t increase at a faster rate, then there’s no upward pressure on wages.