Strong December hiring reported by the government Friday stamped an exclamation mark on the best performance in 15 years for job creation. Despite an unemployment rate that fell to 5.6 percent last month, however, the wages of millions of Americans continued to stagnate.
The mild earnings growth helps explain why surveys show respondents generally unenthusiastic about prospects despite a blistering 5 percent economic growth rate from June through September last year.
Employers added a slightly better than expected 252,000 jobs in December, the Labor Department said, bringing the 2014 total to about 2.952 million. Over the 12 months, hiring averaged 246,000 a month.
The unemployment rate fell two-tenths of a percentage point to 5.6 percent in December, and fell 1.1 percentage points overall in 2014.
“It’s been 30 years since unemployment fell as fast as it did last year,” said President Barack Obama during a visit to Knoxville, Tenn.
The government also revised upward the October and November hiring estimates by a combined 50,000, suggesting strong tailwinds as the economy entered 2015.
If the jobs numbers were worthy of celebration, wage gains were not.
Average hourly earnings fell two-tenths of a percentage point in December. For the entire year, hourly earnings were 1.7 percent higher than 2013.
“There is still slack in the labor market,” Michelle Meyer, a senior economist with Bank of America Merrill Lynch, said in a note to investors. “Although the unemployment rate has tumbled, it has not returned to full employment and there is still underutilization in the labor market.”
Another explanation, she suggested, is that employers don’t feel the need to quickly begin raising pay because they didn’t cut wages much during the Great Recession and its aftermath.
Also, hiring has shifted to lower-paid jobs, which depresses the broader workforce earnings, Meyer said.
Economists are split over whether earnings will pick up or remain stagnant.
“Faster wage growth remains the missing piece of the puzzle, but with the unemployment rate declining further and 21 states raising their minimum wage starting this month, wages should accelerate as 2015 progresses,” said Stuart Hoffman, chief economist for PNC Financial Services.
William Spriggs, chief economist of the AFL-CIO, fears the opposite.
Falling gas prices put more money in people’s pockets, he said, and many employers may view that as akin to a raise and might hold off on paying their workers more. Wages tend to rise in response to rising prices, and inflation remains tame and will be tamer as gasoline grows cheaper.
“The perception on the part of workers on whether there is inflation is influenced by gasoline,” said Spriggs. “When prices are falling people aren’t as anxious . . . they don’t feel squeezed as much.”
There is hidden good news in the jobs report, the labor union economist said. First estimates often don’t capture hiring by small businesses and that is captured by revised numbers in subsequent months. For several months running now, hiring has been bumped higher on revised estimates.
“The constant revisions upwards are the key that the economy really has come back. . . . This is a sign that the economy is finally running,” said Spriggs.
Across sectors, the trend lines improved last year, particularly in the second half.
“Job growth could even kick in to a higher gear later this year as housing construction revs up,” said Mark Zandi of Moody’s Analytics. “At the current pace of job growth, the economy should be closing in on a 5 percent unemployment rate by this time next year, which is consistent with full employment.”
The professional and business services sector, much of it higher-paying white-collar jobs, led all gainers with 52,000 new jobs in December. The construction sector posted a surprisingly strong 48,000 new jobs. The leisure and hospitality sector added 36,000 jobs, suggesting that Americans are loosening the purse strings again.
Manufacturing saw a slight uptick, with factories adding another 17,000 jobs.
“This continues to suggest that manufacturers are increasing their workforces at a decent rate, consistent with recent gains in demand and output” said Chad Moutray, chief economist for the National Association of Manufacturers. “However, manufacturers still face a number of challenges, ranging from slowing global growth to a still-cautious consumer to the prospect of increased interest rates.”
Retailers added 7,700 jobs in December. That’s a soft number, but retailers stand to benefit this year from stronger hiring as falling energy prices and more hiring puts money in the hands of consumers.
“Today’s jobs report was very strong and shows that the labor market is maturing and the economy is performing soundly,” Jack Kleinhenz, chief economist of the National Retail Federation, said in a statement.