As Employment Grows, When Will We See Wage Growth?

Wage growth remains relatively flat despite indicators of economic recovery. As the unemployment rate falls and employment grows, the increasingly smaller supply of workers is expected to lead to wage growth. As Loretta Mester, president of the Federal Reserve Bank of Cleveland, put it recently in the Wall Street Journal, “basic economics hasn’t gone out the window […]when employment grows, wages will start to grow.”

Over the past two years, however, most workers have not seen much wage growth. In fact, there is a somewhat weak but negative relationship between employment growth and wage growth for over 800 occupations from 2012 through 2014 (each occupation is weighted by the number of people employed in that occupation in 2014). There are some outliers, including occupations in the arts with an especially wide range of wages (such as models and makeup artists), but the majority of occupations are clumped approximately equally around low employment growth and low wage growth.

Employment and Wage Growth by Occupation

Using the Bureau of Labor Statistics’ occupation profiles and typical entry-level education requirements for each occupation, the relationship between employment growth and wage growth from 2012 through 2014 differs depending on the education typically required for an occupation.

Employment and Wage Growth by Typical Entry-Level Education for Occupation

Based on a review of the charts by education required, much of the negative relationship for all occupations is being driven by lower-skilled occupations, those that typically require a high school diploma or equivalent or less. Low-skill occupations with employment growth have seen a decline in real wages over this period, while many of the higher paying occupations have seen declining or stagnant employment. This is likely an indication that there is a surplus of available workers at the low-skill level. In fact, unemployment rates for workers without a college degree were well above the national average, as shown in the chart below from the Bureau of Labor Statistics.

Earnings and unemployment rates by educational attainment

For higher-skilled occupations such as those requiring at least a bachelor’s degree, the expected positive relationship between employment growth and wage growth is evident, indicating that labor market slack for these positions has been eliminated or nearly eliminated. Meanwhile, for middle-skill occupations (typically requiring some college or an associate’s degree) the relationship has been flat, which may suggest a tipping point in the near future as the remaining slack diminishes. Even so, the wage disparity between high and low-skilled jobs has been increasing for decades.

These charts align well with other reports indicating that employment is growing for jobs with higher wages and benefits packages, and most of these jobs are going to people with a bachelor’s degree or higher. This is good news for college graduates, but only part of the story—occupations requiring at least a bachelor’s degree made up less than a quarter of total employment in 2014, while  66% of employment in 2014 was in low-skill occupations.

Until the negative or flat relationship between wage growth and employment growth in lower- and middle-skill occupations reverses, we will likely continue to see little real wage growth in the economy at large.

Research support was provided by Patrick Clapp.

Federal Spending Back on the Increase?

Federal spending is back on the upswing. Or, at least it is according to the President’s budget which shows an increase of 7% percent in Fiscal Year (FY) 2015 (October 2014 through September 30, 2015) compared with the prior year.[1] 

The President’s Budget has federal spending growing on average 5.4 percent a year from FY2015 through FY2020 with national defense increasing essentially 0 percent.[2] Although slower than the 6.6 percent annual average growth from FY2000 through the peak in FY2011, the return to some growth in spending is good news for states and metropolitan statistical areas (MSAs) that are dependent on federal contract spending.

We’re not out of the woods yet. A January 2015 Congressional Budget Office report indicates that defense and nondefense funding are equal to or below the FY 2015 budget caps,[3] but the President’s Budget for FY 2016  ignores the caps put in place by the Budget Control Act of 2011 and modified by the Bipartisan Budget Act of 2013.  If the caps are exceeded, a sequestration will reduce federal discretionary spending by approximately $139 billion in FY2016 below the President’s Budget request.[4] About 64 percent of the reduction will occur in defense spending based on current laws.

So which metro area economies are most dependent on revenues derived from contract work for the federal government? Which ones are most at-risk if we see another round of sequestration? Chmura Economics & Analytics took a look at federal contract spending data and assigned it a metro geography based on where the awarded firm performed the work and adjusted it for time of performance since some contracts are awarded for work that is performed over a number of years.

Out of 381 MSAs in the country, the Washington-Arlington-Alexandria, DC-VA-MD-WV MSA topped the list of federal spending with $71 billion in FY 2014. Dallas-Fort Worth-Arlington, TX was a far second with $19.3 billion, and Los Angeles-Long Beach-Anaheim, CA was third at $14.8 billion in FY 2014.

A better way to assess the risk of a region to potential cuts in federal spending is to consider the concentration relative to employment. From that perspective, Idaho Falls, ID ranked the highest ($47,691 per employee); followed by California-Lexington Park, Maryland ($39,940); Amarillo, Texas ($31,407); and Huntsville, Alabama ($30,799).

The interactive map and table below show the dependence of all MSAs in the nation on federal spending.

Research support was provided by Patrick Clapp.

 

[1] President’s Budget FY 2016, Table S-1

[2] President’s Budget FY 2016, Table 28-1 Net Outlays by Function, Category, and Program

[3] https://www.cbo.gov/sites/default/files/cbofiles/attachments/49889-sequestration.pdf

[4] President’s Budget FY 2016, Table 5.6—Budget Authority for Discretionary Programs: 1976–2020

Hollowing Out of the Middle Class?

We’ve heard a lot about the hollowing out of the middle class.  That is, a trend of solid job growth for middle-class Americans which turned into contraction during the Great Recession. This contraction persisted after the recession ended as more of the jobs held by the middle class moved offshore, were consolidated into fewer jobs, or were lost to productivity gains resulting from technology and innovation.

Was this hollowing out driven by the recession or is it indicative of a new norm? Chmura economists looked at this issue in 2013 and verified a clear hollowing out of the middle class, as shown in the chart below.[1] During the period from 2001 through 2011, wages were mostly stagnant, with gains exceeding inflation for only those occupations on the high end of the wage scale. Also, job growth was mainly isolated to those jobs paying the least and those paying the most (see our related post Where the Jobs Are for more).

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Now, with data available through 2014 and three additional years’ distance from the end of the recession, are the jobs in the middle faring any better?

Using the same methodology as in 2013, the results demonstrate a continuation of the trends identified in the 2011 data with modest improvement. Wages grew slower than the pace of inflation for all but the 7th, 9th and 10th deciles, with deciles 2, 3, and 6 showing the slowest growth. Specifically, inflation-adjusted wages declined 3.5%, 5.0%, and 3.3% in deciles 2, 3, and 6, respectively. Similar to our findings in 2013, job growth has been the fastest in the 10th, 9th, and 1st deciles. Also, the middle class—represented by deciles 4, 6, and 7—showed negative job growth between 2004 and 2014, albeit relatively smaller declines than reported in the previous blog. 

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On a more positive note, employment grew in the 5th decile, which includes occupations such as dental assistants, medical secretaries, and customer service representatives. In addition, employment grew in a number of middle class occupations between 2004 and 2014, and many are expected to continue to grow, as demonstrated in the sample selection of occupations in the table below.   

  Avg Ann
Empl
Growth
2004-2014
Forecast
Avg Ann
Empl Growth
2014-2024
Decile
Interpreters and Translators 7% 4% 7
Health Technologists and Technicians, All Other 7% 2% 7
Medical Equipment Repairers 6% 3% 7
Insulation Workers, Mechanical 5% 4% 7
Occupational Therapy Aides 5% 3% 4
Medical Assistants 4% 3% 4
Industrial Machinery Mechanics 4% 2% 7
Computer User Support Specialists 4% 1% 7
Pharmacy Technicians 4% 2% 4
Physical Therapist Assistants 3% 3% 7
Medical Appliance Technicians 3% 1% 6
Machinists 1% 1% 6
Source: Chmura Economics & Analytics and JobsEQ®

Growth in high-demand occupations such as these may lead to more competitive wages for the middle-deciles that could reverse current trends. For now, the data help explain the frustration that many have felt towards slow job recovery and wage growth post-recession. Stagnant wages have not been limited to the middle; spending power declined for seven of the ten deciles. Meanwhile, the middle-wage deciles in this analysis accounted for more than 40% of all jobs where job growth has been slow, at best, for those workers over the past decade.

Research assistance for this post was provided by Johnny Constable, Claire Brunner, and Leah Deskins.

[1] This analysis was created by using over 800 occupations identified by the Bureau of Labor Statistics. We broke the occupations into ten groups based on employment and wages earned and analyzed each deciles based on job and wage growth.

Economic Impact: Jobs are being created but workers are underemployed

The unemployment rate is dropping and jobs are becoming more plentiful, but that doesn’t mean workers are in their ideal jobs.

Some people who are working are “underemployed.”

The Bureau of Labor Statistics officially defines underemployment as someone who wants to work full-time and can only find part-time work.

Arizona and California had the highest number of underemployment among states for the four quarters that ended in March, BLS data shows.

Underemployment can be measured at the state level by looking at the difference between two different jobless rates that the BLS compiles.

Arizona and California had the largest gap between the two rates, having a difference of 6.2 percentage points each. Nevada followed with 6.1 percentage point difference.

The state with the least amount of underemployment, because workers are employed part time for economic reasons, was North Dakota with a 1.8 percentage point gap.

For the U.S., the difference between the two rates that the BLS compiles was 4.4 percentage points for the four quarters that ended in March.

Virginia ranked with the 32nd gap in the nation at 3.8 percentage points.

However, BLS’s definition does not capture those who are working in an occupation below their level of qualifications. For example, it doesn't count someone with a master’s degree who is working as a retail salesperson.

There is no official measure of such underemployment by occupation.

But it can be estimated by comparing the educational skills  of residents in a region to the education achievements required by occupations employed by industries in the same region.

Looking at all 381 metropolitan statistical areas, the three MSAs with the largest surpluses of high-skilled workers are Barnstable, Mass., with a 13.2 percentage point surplus; Washington, D.C. with a 12.5 percentage point surplus; and San Francisco, with an 11.5 percentage point surplus.

Some of those are desirable areas to live that attract many high-skilled residents. Some of those are college towns where a lot of graduates choose to stay.

The three MSAs with the largest deficits of high-skilled workers are Hanford-Corcoran, Calif., with a 16.3 percentage point deficit; Hinesville, Ga., with a 14.7 percentage point deficit; and Cumberland, Md., with a 14.6 percentage point deficit.

In Virginia, the Richmond MSA is ranked 78th nationally with a 1.3 percentage point surplus of high-skilled workers, indicating that underemployment here is not as much of an issue as it is in other regions.

The Hampton Roads MSA has a 3.4 percentage point deficit of high-skilled workers (ranked 177th), indicating a less severe issue of underemployment by occupation.

Viewing underemployment across the nation shows that even as the unemployment rate continues to drop, underemployment will vary by metropolitan area.

Underemployment in the United States

Many students who graduated during the Great Recession and over the last few years were unable to find jobs for which they were trained. The so-called underemployed workers are employed in an occupation below their level of qualification. For example, a graduate with a Bachelor’s Degree in economics who is waiting tables or working at a retail store is considered underemployed. Chmura calculates a proxy for underemployment by comparing educational attainment supply and demand in a given labor market at various skill levels.

Some metropolitan statistical areas (MSAs) around the country have a higher percentage of underemployed than others.  MSAs in Massachusetts, the District of Columbia, and California top the list of regions that possess a surplus of high-skilled workers in the latest update to Chmura Economics & Analytics’ underemployment dataset.

Interactive FeatureUnderemployment is a useful supplement to other indicators of labor market health. The traditional measure of unemployment from the Bureau of Labor Statistics does not distinguish between workers who are employed in a position aligned with their skills and education. Workers who are underemployed and not necessarily contributing as much as they could to the labor market, represent potential lost productivity, wages, and tax revenue for the region.

High underemployment in a region may also be a positive measure, reflecting the desire of workers to live in a particular area (like the scenic Cape Cod waterfront of Barnstable Town, Massachusetts) and/or higher standards for occupations in certain regions (such as for computer occupations in San Francisco).

Chmura’s underemployment proxies for MSAs, along with more detailed methodology and definitions, are available on our website and at the county, MSA, and state levels within JobsEQ®.

Research assistance for this post was provided by Patrick Clapp.