Blogging on Employment and Job Markets in US Metro Areas

Labor Share of Income, Labor Force Participation, and Wage Growth

Labor share of income and prime age labor force participation rate 1990 to 2016
The labor share of income (the blue line in the above chart) and prime age labor force participation rate (the red line) have both recently increased after long-term declines (labor share of income since the 1970s, and LFPR since the 1990s). Though it is too early to say if those long-term trends have been reversed, these are both positive developments for the labor market.

As shown in the above chart, the labor share of income increased sharply after 2014, and prime age LFPR did so a year later. The unemployment rate, which has fallen steadily from 10% in late 2009, was 5.6% in December 2014, 5.0% in December 2015, and as of the latest reading (May 2017) is 4.3%.

The rate of wage growth, shown in the below chart, has recently increased, with a CAGR (compound annual growth rate) of 2.38% for the 2014 to 2016 period compared to a CAGR of 2.05% for the 2010 to 2014 period (these are nominal growth rates and do not account for inflation).

private sector wage growth 2008 to 2016
Given these changes – increase in wage growth, LFPR, labor share of income, amidst a continued decline of the unemployment rate – 2014 represents a turning point for the labor market.

The increase in wage growth from 2.05% to 2.35%, however, obscures what is going on in the different segments of the labor market. At the industry level, we can see a marked difference in wage growth over these two periods:

wage growth by industry, 2010 to 2014 vs 2014 to 2016
For the 2010 to 2014 period higher wage industries saw higher rates of wage growth. By comparison, in the 2014 to 2016 period wage growth was much more even across industries as shown by a relatively flat slope of the trend line.

The difference is even more dramatic at the occupational level:

wage growth by industry, 2010 to 2014 vs 2014 to 2016

While higher-wage occupations saw higher rates of wage growth over the 2010 to 2014, lower-wage occupations saw higher rates of growth over 2014 to 2016. Note the difference in the trend lines, and the different scales of the Y-axis (wage growth) for the two periods. This shows that the lower-wage end of the job market is finally reaping benefits from the continuing economic recovery.