Washington, D.C., United States—The U.S. economy continues to grow, and wages follow closely.

In August, wages grew 2.9 percent, the fastest rate of increase since the economy started to grow its way out of the Great Recession of 2009.  An increase in new jobs has kept unemployment rate at 3.9 percent.

The recent wage numbers may indicate that a tighter labor market translates into higher hourly compensation.

For years, the labor market has been tightening as payrolls increased and the unemployment rate slowly fell.  The rate of earnings growth, however, has not correspondingly increased.  From mid-2010, the economy continued to add jobs at a rate of around 2 percent quarterly. Increases in average hourly earnings, however, didn’t come close to 3 percent until recently. Until now, wage growth didn’t correspond to a tightening labor market.

The U.S. Census Bureau reports that real median household incomes rose to $61,372, matching the 2007 levels. In other words, over a decade later real median household incomes have finally reached their pre-recession highs.

The present recovery, the slowest since the Great Depression, was also a rebound from the deepest recession in the postwar era. Typically, the more severe the recession the more robust the future economy. Think of it as Newton’s Third Law, but for financial markets: the generation of an equal and opposite reaction requires that a more severe recession must be followed by a more robust expansion from the trough of a business cycle. This has not been so since 2008. The U.S. economy has struggled to top 3 percent growth since the financial crisis, far below the average for previous recoveries in 2001, 1992, 1982, and 1975. Historically, lackluster labor force participation may be an important variable in explaining why.

Although 1.4 million men and 1 million women went back to work full time in August, the labor force still shrunk by 469,000. This drop helped keep the Labor Force Participation Rate far below the pre-recession norm of around 66 percent. The current rate of 62.7 percent is lower than at any point since the late 1970s, when the economy was wracked with the malaise of stagflation: simultaneous high unemployment and inflation.

The Labor Force Participation Rate is defined as the labour force divided by the civilian non-institutionalized population. The “labor force” is made up of all employed and unemployed persons in the economy over the age of 16.

Persons are “employed” if they have worked in the past week. Persons are “unemployed” if they are older than 16, are not employed, and have looked for a job in the past four weeks. If a person is not employed and has not looked for work in the past four weeks, they drop out of the “unemployed” category entirely and the labor force participation rate drops.

Where this gets tricky is the use of the “unemployed” variable to calculate the unemployment rate. The unemployment rate is the ratio of the number of “unemployed” workers relative to the entire civilian labor force. However, if you count as “unemployed,” the denominator stays the same, and the ratio between the two is smaller, yielding a lower unemployment rate, even though employment didn’t increase.

Similar economies, however, have been faring better. In France, Germany, and Canada wages have increased (in real terms) by more than 10 percent, twice the U.S. rate of growth.

But inflation remains a problem in some countries. In the UK, for example, inflation reached 2.7 percent in August. And as the Trump administration is brewing another wave of sanctions against the Iranian economy, inflation is bound to increase because of the oil prices hike—though, Saudi Arabia’s commitment to counterbalance any shortage by pumping more oil might alleviate the danger.

Productivity, on the other hand, has remained stagnate. This is mainly due to the investment cuts that happened during the crisis by the businesses and governments.  The less you spend on training and new technology, the less productive your enterprise. Europe is also fighting high unemployment.

The unemployment rate can decrease in one of three ways:

  1. People move out of the “unemployed” category and into the “employed” category, with little change to the size of the labor force.
  2. The number of “employed” workers increases faster than the number of “unemployed” workers.
  3. Some workers are no longer counted as “unemployed” and fall out of the numerator.


NEWSREP guest author Alex Benson significantly contributed to this article.