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July’s Wage Gains Could Shake the Markets Again

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Wage growth

The greatest conundrum in the whole jobs report remains the wage growth. Despite the historically low-level unemployment, wages haven’t picked up like they should have. In June, the average hourly earnings grew by $0.05 to $26.98. The implied annual growth is 2.7%—unchanged from the previous month and 0.2% growth month-over-month. Economists expected the wages to grow 2.8%.

Wages don’t agree with growth and the unemployment rate

While rising jobs and the falling unemployment rate point to the economy overheating, weaker wage growth doesn’t corroborate with them. Since businesses have a hard time filling vacancies, workers should command a premium, which leads to higher wages.

Why are wages still low?

Weak wage growth is puzzling for Fed Chair Jerome Powell and many others in the economy. Powell called weak wage growth a “puzzle” and said that he’s “certainly would have expected pay raises to react more to falling unemployment.”

There are a lot of different theories about why wage growth remains slow despite historically low unemployment levels. One theory is that the labor force participation rate remains low. Other theories include inequality and lower productivity. Powell offered lower productivity as one of the possible reasons for weak wage growth.

Economists expect wages to continue to rise. Wages are expected to increase 0.3% month-over-month or 2.7% year-over-year in July. While the rate would just keep the Fed consistently on its current interest rate (BND) path, higher-than-expected wage growth could tip the markets into a frenzy again. The probability of a sudden spike in the wage growth is low.

On July 6, after the announcement of the non-farm payroll report, the broader market S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) rose 0.85%, 0.41%, and 1.34%, respectively.

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