Fed’s Yellen: Depressed wages holding back workers

Top Federal Reserve officials have been surprised by the rapid decline in unemployment and improvement in the job market in the last year, but depressed wages are still holding back consumers and preventing a full economic recovery, Fed Chair Janet Yellen said.

In a speech Friday morning at the Fed’s yearly gathering in Jackson Hole, Wyoming, Ms. Yellen said the job market is closer to normal than it has been in the five years since the Great Recession of 2007-2009, with employers this spring having closed the deficit of more than 8 million jobs that were lost during the recession.

But despite a pick-up in job growth this year and the unexpectedly fast fall of unemployment to 6.2 percent, which is within range of what’s considered normal in the U.S. economy, aftershocks from the recession continue to hold workers back and in particular continue to depress wages to abnormally subdued levels, she said.

“Over the past year, the unemployment rate has fallen considerably, and at a surprisingly rapid pace. These developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover,” she said.

Among signs that the job market is not yet back to normal is the elevated number of workers who have taken part-time jobs because they could not find full-time work — about 5 percent of the labor force, she said. Also suggesting weakness is the large number of workers who have dropped out of the labor force since the recession.

And while hiring rates have picked up, the rate of job growth of about 230,000 a month remains subdued to the rate of job growth when the economy was booming in earlier times, she said. Workers also are still showing they lack confidence in the job market by holding onto their jobs and not quitting work as freely as they did in better economic times, she said.

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But perhaps the biggest sign that the job market is still difficult is the fact that Americans have not on average received an increase in wages above the inflation rate for more than five years, she said.

“There has been little evidence of any broad-based acceleration in either wages or compensation. Indeed, in real terms, wages have been about flat, growing less than labor productivity,” she said.

The unusually depressed behavior of wages may reflect the fact that employers could not cut wages during the recession for the workers they retained, though they might have wanted to. Thus, they have been reluctant to increase wages now that the economy is growing steadily again, she said.

Ms. Yellen dubbed this new concept “pent-up wage deflation,” and said it is likely to continue holding wages down until the job market returns to healthier rates of growth.

For these and other reasons, Ms. Yellen said the Fed is still a ways from the point where it has to worry about a pick-up in inflation resulting from a strong market for jobs and wages.

Economists and financial markets took the speech as a sign that Ms. Yellen and other Fed officials are now aware that the job market is closer to getting back to normal, and may as a result start raising interest rates back to more normal levels some time next year.