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The Recent Jobs Report Counters Some Common Economic Myths
The recent jobs report delivered better than expected news: total jobs grew by a remarkable 250,000, and the unemployment rate fell to a 49-year low of 3.7 percent. Average hourly wages rose 3.1 percent, while the most accurate measure of inflation, the Personal Consumption Expenditures (PCE) price index, has been running just under 2 percent throughout this year.
Both the jobs report and the historical record should dispel a number of widely cited myths.
First, they refute the myth that the earnings of ordinary American families have been stagnant in recent years. Using the PCE index to measure inflation and appropriately including health insurance and other non-cash benefits, average real (or inflation-adjusted) incomes have grown at a rate of 1.1 percent per year since 1990 and 1.3 percent per year since 2000. These growth rates are below the unprecedented pace we experienced during the first three decades after World War II, but the assertion that income levels aren’t growing is false.
Moreover, the experience of typical families has been better than these statistics suggest. The earnings of individual workers have grown about 4 percent per year, or more than 2 percent after inflation, since 2015. What holds down the average growth rate is more than 3 million Baby Boomers with higher than average pay are now retiring each year, replaced by lower-paid young workers.
A second myth is that lower-income families are falling further behind relative to higher-income families. The “education premium” earned by better-educated workers remains high in absolute terms, but average wages have been rising faster for workers with a high school education or less than for college-educated workers. And this trend accelerated in last week’s jobs report. Sectors with particularly strong recent wage growth include construction, healthcare, leisure, and hospitality.
Also, labor’s share of the total “pie” is rising. It’s true that returns to capital owners grew as a share of aggregate income at the expense of wages between the early 1990s and the first half of this decade. But this trend has reversed since 2015, as it typically does when the economy is booming.
The data also run counter to a third myth – that wages have been growing at a much slower pace than growth in productivity, or how much an average worker produces per hour. Growth rates in average real wages since 2000 closely match productivity growth rates over the same period. Wage growth for the lowest-income workers, as measured by the bottom decile, also match productivity growth for these workers, according to Stanford economist Ed Lazear, chair of the Advisory Council for the George W. Bush Institute-SMU Economic Growth Initiative.
Finally, this year’s data refute claims that corporate tax relief – centerpiece of the 2017 tax law – has had little economic impact other than funding share buybacks. Both capital investment and corporate research spending are up by double digits this year, and capacity utilization rates are higher than they’ve been in years. All these welcome trends lead to enhanced worker productivity and labor demand, and thus higher real wages.
Needless to say, we could do better. The number of medium-skill jobs continues to decline while low and high-skill jobs grow. This means wage inequality rises, all else equal, even though each group of workers is experiencing solid wage growth. Also, the growing federal budget deficit raises legitimate questions about the sustainability of recent growth rates.
Most important, productivity continues to grow at disappointing rates. Most economists agree the keys to faster productivity growth – and therefore faster income growth – are higher levels of investment and innovation, better education and job training, and a relatively high degree of openness to international trade.
J.H. Cullum Clark is Director, Bush Institute-SMU Economic Growth Initiative and an Adjunct Professor of Economics at SMU. Within the Economic Growth Initiative, he leads the Bush Institute’s work on domestic economic policy and economic growth. Before joining the Bush Institute and SMU, Clark worked in the investment industry for 25 years. He served as an equity analyst and portfolio manager at Brown Brothers Harriman & Co. (1993-96), as a portfolio manager at Warburg Pincus Asset Management (1996-2000), as President and Chief Investment Officer of Cimarron Global Investors, a Dallas-based hedge fund firm (2000-02), and as President of Prothro Clark Company, a Dallas family investment office (2002-18). Prior to entering the investment industry, he served for one year on the staff of the U.S. Senate Select Committee on Intelligence.
Clark fulfilled a lifelong goal by earning his Ph.D. in Economics at SMU in May 2017, and subsequently joined the faculty of SMU’s Department of Economics. His research has focused on monetary policy, fiscal policy, financial markets, economic geography, urban economics, modern economic history, and economic growth.
Clark's volunteer leadership activities include serving on the boards of Uplift Education, the Eugene McDermott Foundation, the Yale University Art Gallery, and the Foundation for the Arts, as well as on the investment committee of SMU. He earned a B.A. in History from Yale University in 1989 and an A.M. in Political Science from Harvard University in 1993, in addition to his Ph.D. in 2017. After graduating from Yale he lived for one year in Japan. Clark and his wife Nita have three daughters: Lili, Annabel, and Charlotte.Full Bio