The great flatline of wage expectations

December 5, 2014

It’s not just wages around the industrialised world that are flatlining. So are expectations.

While there is considerable change from month to month on U.S. pay statistics, what has remained virtually constant throughout the past decade is a weak rate of pay growth that has not managed to keep pace with inflation.

But what has become more entrenched is the consensus view, running for four straight years, that pay growth won’t strengthen.

US avg earnings poll

While they’re still overoptimistic, for the most part, these forecasters have been right. The 0.2 percent expectation doesn’t match reality each month, but it’s the signal in the noise. Nothing’s changing.

Back at the start of the flatline, in November 2010, the jobless rate was 9.8 percent and only 137,000 jobs were created that month. The unemployment rate has since plunged by 4 percentage points to 5.8 percent, and if the latest Reuters poll predicting 230,000 jobs were created in November is close to the truth, it will mark the longest stretch of monthly job gains greater than 200,000 in 20 years.

The question troubling policymakers – to say nothing of the hundreds of millions of people across the industralised world hoping for a raise – is when the pickup in pay is expected to come.

But wage growth isn’t meaningful when it’s not real, or in other words, when it’s not rising faster than inflation.

So long as this remains the case, and central bankers remain clear that in order for rates to go up, wage growth will need to accelerate, rates won’t be going anywhere.

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