Why have US wages stayed so low?

The US labour market “roared back to life” last month, says Tom Knowles in The Times. June saw 220,000 people added to payrolls, a strong rebound after a lacklustre spring. The unemployment rate remains at an historically low 4.4%, but wage growth has yet to catch fire: the annual pace of 2.5% has barely changed for well over a year.

This highlights one of the more unusual features of the post-crisis recovery. In the past, once the US unemployment rate has fallen to today’s levels, wage inflation has tended to start rising steadily – and interest rates have tended to follow. This time round that hasn’t happened. Why not?

The cumulative impact of several structural changes best explains sluggish wage growth, according to Irwin Stelzer in The Sunday Times. Union power has dwindled; immigration will have lowered wages in some sectors; there is more competition from low-wage countries now that globalisation has spread; some highly paid manufacturing jobs have disappeared; and productivity has been poor.

Another striking facet of this recovery is the large potential slack in the labour market. There are more people than usual outside it; if they came back in, employers would have a larger pool of people to hire from, and the increased competition for places would also keep a lid on pay rises.

The US participation rate (those either employed or actively seeking work) has slipped to a 40-year low of 62.7%, from 65.9% a decade ago, “a much larger drop relative to previous business cycles”, says a Bank of Canada note. That’s a fall of 8.2 million people, or 5.2% of the 253-million-strong labour force. The trend is partly due to retiring baby-boomers and more people on disability benefits. But a key factor is the dearth of men. The participation rate of the 25- to 54-year-old cohort is lower than in the 1930s.

One issue is the rampant use of opioid painkillers, which can lead to heroin abuse, says Gina Chon on Breakingviews. A total of two million Americans are abusing their painkiller prescriptions. A high incarceration rate also plays a part. Five million working-age men have a criminal record, making it difficult to secure a job. Tackling these severe problems will take time. For now, the long-term shifts in the US labour market will make rapid interest-rate rises less likely, inflating asset bubbles yet further and increasing the danger of another bust.

“God” throws in the towel

Andrew Hall’s bullish bets on oil during the supercycle of the 2000s made him a lot of money and earned him the nickname “God”. He famously earned $100m for his then-employer Citigroup when prices soared to over $140 a barrel. Since the oil-price slump of 2014 he has remained bullish, predicting a sustained recovery. But now, says David Sheppard in the Financial Times, he appears to have lost his religion.

In his latest newsletter the head of the $2bn Astenbeck Capital fund acknowledged what many analysts have been saying for ages: there has been a paradigm shift in the oil market. Oil-cartel Opec “and oil bulls have run out of runway”, he notes. Breakeven prices for the sector have fallen owing to “secular productivity gains”.

So output is climbing and the shale sector has shrugged off Opec’s bid to bolster prices; the cartel, moreover, didn’t help itself by agreeing too small a supply cut to change market expectations significantly. The upshot, he agrees, is that “US shale will be the marginal source of supply, at least until 2020”. Prices will stay in a range around current levels for some time.