Curious Capitalist

Why A Stronger Economy Probably Won’t Translate Into A Raise — Yet

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Last Friday’s jobs numbers came in strong, particularly in important areas like manufacturing, on which President Obama is staking much of the economic component of his re-election campaign. If voters start to feel more prosperous than they have over the last few years, it will certainly help him at the polls in November. But in order to cement that feeling, the average Joe needs a raise. So, are salaries finally rising as unemployment is falling?

The answer, sadly, is not yet. In 2010, labor’s overall share of the economic pie in this country reached its lowest level in 60 years. It’s rebounded a bit since then, though in theory it should have rebounded more based on the fact that easy productivity gains in this country are largely tapped out (workers are working just about as hard as they can, and more technology driven gains will require more capital investment that a lot of companies have been reluctant to make).

(MORE: 227,000 New Jobs Is Good. But Has the Economy Reached Escape Velocity?)

Meanwhile, reduced bargaining power and the effects of globalization have kept the downward pressure on salaries, according to Capital Economics, which believes that we may finally be reaching a turning point at which salaries have to start rising. If they do, it could be bad for the stock market, since it would cut into corporate profits, but it would certainly help fix the most pressing economic problem in the country, which is the shrinking middle.

That point could be at least a few months away. So far, there’s still a lot of slack in the labor market – the employment to population ratio is still only 58 percent, which means that hiring companies are still in the driver’s seat, and income growth remains, as Bank of America put it in a recent research note, “feeble.” Hourly earnings are up only about 0.1% a month – though the number of working hours continues to rise. Clearly, there’s still a ways to go until the average American worker starts to feel this recovery in his wallet.

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