People Rejoining The Workforce Are Keeping Wages Down

After giving up on finding a job during tough economic times, people have been streaming back into the workforce in recent years as growth picks up.

Employment data released on Friday highlighted two seemingly contradictory trends shaping the lives of American workers: Unemployment is close to historic lows, but wages are not shooting upward in the way you'd expect in an economy with a shortage of available workers.

The key to each trend is the size of the US workforce — the total number of people employed or looking for a job. The workforce grew by 361,000 in June, pushing the unemployment rate up to 4.4% even as the economy added 220,000 new jobs. Hourly wage growth remained slow and steady.

The high number of newcomers to the job market, even if they aren't all working yet, is a reminder that the economy still has plenty of room to expand. It's also a reminder that even with unemployment close to historic lows, wages could stay flat. Instead of employers needing to raise wages as they compete for a shrinking pool of unemployed people, the workforce could keep growing faster than new jobs are created.

The newcomers to the job market, in many cases, are people who gave up on trying to find a job when the economy was bad. With the economy growing steadily in recent years, they've been returning to the workforce in significant numbers.

The really good news in this jobs report is that robust jobs growth is luring more and more people back into the workforce.

Each month we're learning that the labor market has greater capacity than we had previously understood.

The important number to watch in all this is the "labor force participation rate" — the percentage of people aged 16 and over who are in the workforce. It is currently at 62.8%, which is about the same as it was a year ago — even as an increasing number of baby boomers head into retirement.

The last few jobs reports made it look like we were awfully close to full employment. This one makes it look like there's more room to run.

The return of all those working-age people to the workforce is one reason why wages are growing slowly even though unemployment is near historic lows. The June job report shows hourly wages in the private sector grew by 2.5% in the last year — a figure in line with recent years.

"Once again, the buzz kill on the jobs report is the lack of more substantial wage growth," Mark Hamrick, Bankrate's senior economic analyst said. "This suggests that we’ve not yet checked off the 'full employment' box, meaning more progress can be extracted from the job market."

Skip to footer