It’s Not All Good: Here Is The Real Problem Deep Inside The Jobs Report

On the surface, today’s jobs report was solid: despite the headline miss, July payrolls were in line with expectations when one strips out Toys “R” Us job losses and the volatile summer vacation-linked occupations. Wages also came in line, rising at 2.7% Y/Y (a number which however was the most negative since 2012 when adjusted for inflation).

However, looking deeper between the lines reveals a potentially troubling problem.

Consistent with historical experience however, the breakdown in job creation by wage has evolved throughout the expansion. At first, more of the new jobs are for people with skills. As the cycle matures, job creation rotates in favor of lower-wage positions. Lower-wage workers are more easily replaced and have less bargaining power, so benefits from the economic expansion do not trickle down until the labor market is especially tight.

What this means in practical terms – as DB’s Torsten Slok explains – is that over the last three years, i.e. during the later stage of the current expansion, cumulative low-wage employment has risen by 104%, outperforming the high-wage segment which increased by only 64% over the same period. In the three years preceding that, high-wage jobs were created at a much higher rate, increasing 251% compared to only 28% for low-wage jobs.

And, as shown in the chart below, this means that high wage jobs have actually been declining throughout 2018 as employers have shifted their hiring to low-wage occupations, and replacing existing highly-paid workers with less productive, but cheaper, surrogates.

This has significant consequences for wage growth: the greater the portion of low wage jobs as a percentage of total, the more subdued overall hourly earnings growth will be. Which is precisely the phenomenon we have observed in recent years, and is what has stumped the Fed for which wage inflation has repeatedly been defined as a “mystery.”

There is another major problem: in their pursuit of semi-skilled workers, and low wage employment in general, potential employers have aggressively lowered their selection criteria. As a result, according to the BLS, over the past 3 months the vast majority of the total workers hired, some 1.1 million, are high school graduates or those without a high school diploma.

What about workers with some college degree or higher? Here the US economy has actually lost 233K workers!

Pink Floyd was right: American workers indeed no longer need any education.

Alas, there are extensive negative consequences of hiring workers who have – at best – graduated from high school. First and foremost, a chronic lack of productivity, which incidentally is also the key reason why this has been the slowest economic expansion in US history. And as the latest data reveals, the recent surge in hiring of less than college grads, confirms two things: wage growth will remain anemic at best, and productivity – that key component of GDP – will continue to shrink.

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