Global labour glut suppressing American wages

NEW YORK (Bloomberg) - The long-sought rise in American wages is being suppressed by a global labor glut that is undermining policy makers' efforts to wring slack from the U.S. job market.

"With regions such as South Asia and Africa waiting on the fringes, the excess supply of labor is likely to be with us for many decades," Barry Bosworth, senior fellow at the Brookings Institution in Washington, said in an interview via e-mail. "If Americans want further gains in their living standards, they will need to increase their skills."

The most effective way of combating this oversupply is to promote increased training and education of U.S. workers so they can provide skills unavailable elsewhere to employers, according to experts who have studied the problem.

While the Federal Reserve has sought to reduce labor-market slack through the use of accommodative monetary policies, such mechanisms may have less influence on wages going forward, according to economists. That's because faster U.S. economic growth won't guarantee that excess domestic labor-market resources will be quickly put to use, as employers seek cheaper alternatives abroad.

One way out of the dilemma: Give Americans the information and training that equips them to meet the requirements of higher-paying jobs.

"Instead of the prior wage rates for a few, we are experiencing increased employment for many," Bosworth said. As a result, U.S. workers will need "to move further out of the market for unskilled labor to occupations with more education and skill accumulation."

Much of the improvement in the U.S. job market over the past six years has come with caveats. While the unemployment rate is at an almost seven-year low of 5.5 per cent, the decline has been accompanied by a drop in the share of the working-age population in the labor force.

The economy added 3.1 million workers to payrolls last year, the most since 1999, yet the number of part-timers who'd rather work full-time remains higher than before the recession. Also, those unemployed for 27 weeks or more make up a larger share of the jobless now than at the depths of all prior recessions.

The result presents Fed policy makers with a puzzle as they consider raising interest rates for the first time since 2006.

"To give us the best chance to recover lost ground, we need policies that support labor force participation, business and household confidence, hiring and investment, and productivity growth," Fed Board Governor Jerome Powell said in an April 8 speech. These policies "are, for the most part, outside the remit of the Federal Reserve."

One reason why the Fed's control is limited is the increase in the global supply of labor. In contrast to developed countries, where the workforce is either growing slowly or contracting, emerging nations are modernizing, enabling millions of workers to offer up their labor to the global marketplace.

Places such as India and the developing economies within South Asia and Africa are now supplying the biggest additions, said Robert Shapiro, chief executive officer of economics advisory firm Sonecon and an adviser to the International Monetary Fund. The world's labor force grew by 1.4 per cent in 2013, the latest year for which data is available from the World Bank. That was the biggest increase since 2005, when it climbed 1.8 per cent.

These other fast-growing areas are taking over from China, where the working-age population fell for a third straight year in 2014.

Even so, the world's second-largest economy is still urbanizing, giving millions the opportunity to seek out work. China has added more than half a billion people to its cities in the last 35 years thanks to internal migration, which has "raised the living standards of the Chinese people and offered economic opportunities in new sectors and locations," according to the Organization for Economic Cooperation & Development. The urban population is expected to increase by a further 240 million in the next 35 years.

"Part of what this is about is the emergence of a single global economy where we used to have two," Shapiro said. "The other is mainly about the very rapid pace of modernization - that's what's throwing them into the labor force."

The competition among workers internationally could slow the nascent progress on pay that's under way in the U.S. Wages and salaries for private-sector employees climbed 2.8 per cent in the first quarter from the same time last year, the biggest gain since 2008, the Labor Department's employment cost index showed last week.

A lack of basic skills may prevent Americans, especially young adults, from competing for better-paying jobs.

In literacy, U.S. millennials - those 16 to 34 years old - scored lower than 15 of 22 countries participating in a survey of adult skills developed by the OECD, according to an analysis by the ETS Center for Research on Human Capital and Education. In numeracy and problem-solving in technology-rich environments, U.S. young adults were among the lowest, along with those in Italy, Spain, the Slovak Republic and Poland.

"It points to some distributing potential problems," especially because "millennials are going to be in the labor force for the next 40 to 50 years," said Madeline Goodman, one of the authors of the ETS report.

This is happening even as education levels reach new highs. Some 35 per cent of 25- to 34-year-olds have completed four years of college or more, the highest share in records going back to 1940, according to U.S. Census Bureau data. The increase is being led by growing educational attainment by women, while the share of men with four years of college or more has risen more slowly.

"More and more we're in a knowledge-based economy, so people want to acquire more knowledge to be competitive," Goodman said. "The question is whether all of our educational institutions are imparting the kinds of skills that they need to be. It's a problem if people are getting years of education but not the skills commensurate with it."