Wage Growth Isn't So Sluggish After All

(Bloomberg View) -- Baby boomers can be forgiven for thinking that the world revolves around them, because the U.S. economy actually has. Until now.

As boomers left the nest and formed households in the 1970s and 1980s, they contributed first to inflation, and later to strong economic growth. In mid-life in the 1990s and 2000s, they bought stocks and houses -- driving the growth of the equities market and housing prices. And now, as they retire in droves, they're throwing U.S. economic data into Bizarro World.

Check out the broadest measures of the labor market. One looks like good news: Unemployment is 4.4 percent, lower than it's been since 2007. Another looks like bad news: Wage growth has barely budged in over a year.

Neither unemployment nor wage growth captures the emerging disparity between boomers and younger workers.

If, hypothetically, millions of older, high-earning workers retired last year, and younger, lower-paid workers received modest wage increases to assume their responsibilities, that would feel like wage growth to working Americans … but the average hourly earnings data would show a sharp drop in aggregate wage growth, because millions of boomers' earnings would have plunged with retirement. With baby boomers retiring in large numbers for many years to come, this will be a drag on the wage-growth data well into the 2020s. The question is whether younger workers will receive those modest wage increases.

Luckily the Atlanta Fed, using observations of individuals taken a year apart, publishes data on wage growth by age. Here we see that the hypothetical is not just hypothetical. Retiring baby boomers really are dragging down the data on average wage growth. As of April, median wage growth for workers ages 16 to 24 is running at 7.5 percent, around the same levels as in 2006. Wage growth for workers ages 25 to 54 is running at 3.8 percent, the same levels as late 2005. But for workers over 54? Just 2.2 percent, still below the lows of the last cycle.

Older workers receive less wage growth in general (some retire; others semi-retire; others have simply plateaued in their careers). Compounding that, their recent rate of wage growth is below the historical norm for their age bracket, and we have more older workers than we have ever had before. It all adds up to wage-growth data that does not reflect the reality experienced by younger workers or older workers.

Indeed, the number of job openings is very high. Small businesses are increasingly complaining about difficulties in finding quality labor. The effects are being felt. One of the stories of this earnings season has been the impact of higher wages on restaurants' profit margins (fortunately for the companies, this expense was somewhat offset by food cost deflation). For the economy as a whole, wages' share of GDP is at its highest level since the recession, and higher than any point in 2005 or 2006.

These are all great tailwinds for younger workers. We don't yet know whether higher wage pressures will lead to more inflation, lower profits, or a combination. But we do know that for the next decade or so, we can't take the wage-growth data at face value.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

To contact the author of this story: Conor Sen at csen9@bloomberg.net.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

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