Intermezzo: Behavior of Wages at Tops and Bottoms
(note that in these charts, the red line is y/y % wage growth, and the blue line is the inverted unemployment rate)
Perhaps a year before the Unemployment Rate rises, Wage Growth falls abruptly. This seems to be the canary in the coal-mine for future employment contraction.
Near the end of the business cycle, Wage Growth recovers, often while the Unemployment Rate have a difficult time making new lows. Initial Claims then spike.
Before or coincident to the to the top in the Unemployment Rate (near the bottom of economic activity), there is a spike in Wage Growth – right before it has one final downdraft.
Higher paying jobs like Professional Servies that are associated with business expansion near the end of a business cycle are shed. This leads wider employment trends, particularly in Temporary Professional and Business Services.
This particular theory seems to have credence lent to it by the obvious relationship between Investment and Temporary Professional and Business Service payrolls:
However, as the need to scale back spending late in a business cycle occurs, the least productive payrolls are dropped, which are also typically the least well renumerated. This is likely why Wage Growth rises while the Unemployment Rate first begin to rise.
As a new business cycle begins and companies begin to invest once again, it only stands to reason that they will invest in the highest productive (which are similarly highly paid) workers. Anecdotally, it’s been my experience that recessions and the early-stages of recovery bring new opportunities and projects which require the services of more specialised (generally more expensive) workers to architect them. As those projects ramp and scale up, they then require less specialised labour.
Relative to my hypothisis, the question is whether the little bump in 1Q-2010 was adequate in hiring the specialists required to implement the new projects to fulfill the new opportunities brought by fresh recovery.
From EconomPic, it is clear that the big business has not yet participated in the return to hiring. I postulate that while small business projects probably already necessitate an increase in less specialised workers, large corporate hiring probably still requires engineers, lawyers and accountants. This means we may see more tepid payroll growth for the next few months simultaneously with stronger wage growth.
Friday’s “Employment Situation” report from the BLS may suggest this, with payrolls missing expectations by 102k, while Average Hourly Earnings m/m (+0.4%) double expectations.
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