Cheap gas may take the sting out of falling wages

January 9, 2015, 6:58 PM UTC
gas pump
A person filling a petrol tank
Photograph by Maria Wachala—Getty Images/Moment Open

The jobs report released by the Labor Department on Friday was pretty much more of the same. Job growth was strong, the unemployment rate fell, and wage growth was nowhere to be seen.

In fact, average hourly earnings fell in January by 5 cents per hour, while wages have only risen 1.7% over the past year. That’s barely above the inflation rate, meaning that workers aren’t seeing their incomes, on average, rise in real terms. With job growth in 2014 stronger in absolute terms than in any year since 1999, and with the unemployment rate at 5.6%, it’s clear that a lack of jobs isn’t the problem so much as a lack of good-paying jobs.

We know this because wages haven’t been growing, but also because the labor force participation rate, or the percentage of working age folks who are in the labor force, remains so low. If the jobs we were adding were high-quality and high-paying, it would surely encourage some of the people who have recently left the labor force to return.

US Labor Force Participation Rate Chart

US Labor Force Participation Rate data by YCharts

Some of the decline in the labor force participation rate is due to the aging of the workforce, but it is also due to the lack of attractive jobs, as the orange line shows that people ages 25 to 54 are leaving the labor force, too.

Rising wages are a key to better economic performance because they indicate an improvement in the average American’s financial status. If more people are making more money, there’s much more cash to spend, and more opportunities for entrepreneurs to find markets for their products and hire additional workers.

Luckily, we have a few reasons to not to be too glum about the news that average hourly earnings fell in December. First, there’s reason to believe that the Labor Department’s methodology is giving us a skewed picture. According to Neil Dutta of Renaissance Macro Research, worker wage averages may be falling because high-paid baby boomers are retiring, all while the typical prime-age worker is seeing improved growth in pay. Second, Dutta points out that average earnings as reported in the Employment Situation Report doesn’t include incentive pay like bonuses, and that omission could cloud our view of the situation.

Finally, the big economic story of the day—falling oil prices—may take some of the sting out of stagnant wages. Here’s a chart of real wage growth over the past 30 years:


As you can see, median worker pay hasn’t gone up much over the past three decades, but we have still seen periods of wage growth during that time. Economists often point to the late 1990s as a Goldilocks period, where inflation and unemployment were low but wage growth was high. Between 1994 and 1999, typical worker income increased roughly $1,200 per year. Meanwhile, economists estimate that the recent decline in oil prices will save the average consumer about $750 per year. Economists don’t expect oil prices to continue to decline at the rate that they have fallen so far this year. So that $750 is more like a one-time raise rather than the half-decade of wage growth we saw in the 1990s.

But this comparison shows that the savings drivers are experiencing from cheaper gas is significant. And if the labor market continues to tighten, economists expect that real wage growth will follow at some point this year. In other words, cheap gas might be a kickstart to the broad-based recovery that we’ve been waiting for.