If the monthly jobs report were a TV sitcom it would truly rival “Seinfeld” as a “show about nothing”. That is to say, for years the report has suggested nothing especially remarkable about the US labor market, but without fail the talking heads of bubblevision nevertheless launch into energetic chatter about its manifold significance each and every month. More often than not, they even pronounce it to be the most important monthly jobs report since, well, the last one.
For instance, the November average hourly wage rate posted 12 cents per hour higher than the October level, and if you multiple that figure by 12 you get $1.44 per annum, which, in turn, would amount to a 4.11% annual gain.
But so what? That’s less than the LTM run rate of inflation, which was 4.44% according to the trusty 16% trimmed mean CPI for October. The larger point, moreover, is that the November increase—which amounted to nothing in real terms—wasn’t just indicative of a spot of bad luck or some kind of short-term aberration.
Far from it. As it happens your editor can (very) dimly recall sitting at a desk in the Longworth House Office Building as a junior congressional staffer tasked with writing a half page memo on the January 1973 jobs report. Of course, that was more than 50 years ago, but some things have remained the same.
In fact, exactly the same. We are referring to the inflation-adjusted average hourly wage rate. Not only did it not change a whit during this past November, but it also actually hasn’t gained a penny of real purchasing power in the last half-century!
Inflation-Adjusted Nonfarm Average Hourly Wage Rate, 1973 to 20023
Needless to say, it took a whole lot of Fed money-pumping during that long interval to generate the round trip to nowhere depicted above. To wit, the nominal average wage actually rose from $4.05 per hour in January 1973 to $29.30 per hour at present according to this morning’s BLS report. Yet every dime of that 625% wage increase got devoured by inflation.
So the better topic for the monthly jobs chatter on bubblevision’s long-running financial sitcom might be why in the world has the agency charged with superintending “stable prices” produced so damn much inflation? And also, why hasn’t a central bank balance sheet, which has grown from $98 billion to $8 trillion or by 82X over that period owing to recurrent rounds of monetary “stimulus”, generated more success in raising real wage levels?
Alas, the answer might well be that the Fed’s essential tools—buying government debt and pegging money-market interest rates—are not, as a practical matter, fit for purpose. It might be that the resulting pro-inflation policy geared to detailed macro-management of output, employment, investment and other components of the main street economy actually produced the abject half-century long failure depicted above.
In fact, there is a pretty good hint of that in the November report. We are referring to the fact that the best way to materially and steadily raise the average real hourly wage in the overall US economy—and therefore main street living standards—is to minimize inflation and optimize the mix of jobs which comprise the current 157 million nonfarm total.
In fact, however, even as nominal wage gains have been consumed by cumulative inflation, the mix of jobs in the US economy has deteriorated badly, thereby weakening the average pay level even before inflation ravaged its purchasing power. And that deterioration was fully on display in November when 94% of the 199,000 new jobs were attributable to the health care and social services sector (99,000), leisure and hospitality (40,000) and government (49,000).
Self-evidently, these sectors are on the low-end of the value -added chain and therefore the bottom of the pay scale—at least with respect to the two private sector industries. For instance, the annualized weekly rate of pay for leisure and hospitality jobs was just $28,500 and for education, health and social services it was $57,200.
That compares to an average of $61,000 for the nonfarm private economy overall, $72,100 for goods-producing industries and $109,600 for the utility sector. Furthermore, the latter two high pay sectors generated only 19% of the new jobs reported for November.
Again, we are not talking about a spot of bad luck. If we go back to January 1973, and index the jobs in these low-pay or low productivity sectors with the two high pay sectors and the average for the economy as a whole, there is little left to the imagination.
The fact is, the BLS count of payroll jobs in the goods-producing sectors—manufacturing, construction, energy and mining—is down at -6% from a half-century ago, while jobs in the utility sector (purple line) are still -1% below their January 1973 level.
By contrast, the count of government jobs (red line) is up by +65% and leisure and hospitality employment (blue line) is +217% higher. Even more significantly, the putative “private” sector component of the labor market which is overwhelmingly fueled by government tax credits and transfer payments—private education, health care and social services (brown line) —saw employment rise by +414%.
In short, the sectors which have dominated the rise in headline jobs over the last half-century sport average productivity and average pay levels sharply below the high-pay sectors which have essentially flat -lined since 1973. By the sheer math, therefore, the average nominal wage level in the overall economy has sputtered, even as inflation feasted upon such gains as actually materialized.
US Employment Levels By Sector, Indexed to January 1973
Needless to say, the composition of GDP pretty much tracks the jobs trends shown above. During the last 50-years real PCE for services rose by 2.71% per annum, or by 160% of the rate of gain in US industrial production, which clocked in at just 1.68% per annum.
Of course, consumption of goods didn’t actually lag during that span. In fact, the per annum gain of 5.0% for real durable goods PCE was nearly double the growth rate for real services PCE. And the same was true versus overall real PCE, which posted at 2.83%.
There is no mystery, however, as to the huge gap between the growth rate of domestic industrial production (1.68%) and durable goods consumption (5.0%) since 1973. The bulk of durable goods consumption gains consisted of imports.
Index of PCE for Services Versus US Industrial Production, 1973 to 2023
For avoidance of doubt, here is the 50-year trend in real imports of goods. The 1,111% gain shown in the chart below computes to 5.1% per annum or more than double the growth of overall output.
Stated differently, as of 1973 the world was teeming with cheap labor, cheap real estate, developing-world governments willing to sacrifice air and water quality to promote growth of jobs and living standards, burgeoning technology, fully mobile capital and a steady recovery of the pre-WWI regime of freer global trade in goods and services.
Under those conditions, the last thing the highest cost economy in the world needed at the very juncture in which the dollar’s link to real money (gold) had been severed by the foolishness of Tricky Dick Nixon, George Schultz and Milton Friedman was a pro-inflation central bank.
Index of Real Goods Imports, 1973 to 2023
But that’s what we got—in spades. And it’s the reason that the average US real wage has gone precisely nowhere for the past half-century.
In a word, unit labor costs have grown by 326% or 2.5% per annum year-in-and-year-out for a half century. This development, in turn, rendered high-cost American industry a sitting duck for off-shoring to cheap labor venues abroad.
Of course, Uncle Milton Friedman told Nixon not to worry about such potential adverse developments because the free market would continuously compensate for inflation differentials in the form of a weaker dollar and therefore higher acquisition costs for foreign goods.
Alas, Professor Friedman gave political naivete a new definition. Did it not occur to him that governments stupid enough to put price controls on rents and trucking rates would not try to put price controls on their own “floating” rate currencies. That is to say, there was never a remote hope of free market exchange rates.
Mercantilist governments went for “dirty floats” like a large colony of moths heading for a light bulb. And so the impact of the soaring domestic dollar-based production costs depicted in the chart below didn’t get adjusted out in the free market for exchange rates. Instead, American industry got exported to China et. al.
At length, of course, we also got knucklehead protectionist politicians like Donald Trump, too.
US Unit Labor Cost Index, 1973 to 2023
Reprinted with permission from David Stockman’s Contra Corner.
