Guest Column: Sluggish Wage Growth Becoming a Thing of the Past in California

By Scott Anderson

This presidential election cycle has revealed the frustration of the electorate toward the pace of economic improvement in this expansion. A big part of voter frustration is centered on the sluggish pace of annual wage growth for a majority of workers. Wage growth has been depressed in this recovery, rising at a modest 2.1% annual average pace over the past seven years, about a third the pace seen prior to the Great Recession.

Figure 1

But with the national unemployment rate now below 5.0%, we�re down to the level where most economists consider the U.S. economy fully employed. We would expect to see a gradual improvement in current wage trends as the labor market tightens. Indeed, average hourly earnings have grown at a slightly higher rate over the past 12 months (2.4%) (See Figure 1) as the U.S. labor market has remained tight. More evidence of progress comes from the Conference Board�s consumer confidence reading in September, which hit its highest level of the expansion at 104.1, as more consumers saw an improving labor market.

So how does California stack up to the nation on wage growth in this expansion?

California has a large and diverse economy, and the unemployment rate in the state peaked at a higher level during the Great Recession at 12.2% -- almost 3.0 percentage points higher than the nation as a whole. Even today, California�s unemployment rate remains about a half a percentage point above the national average at 5.5% in July. California�s job growth has far exceeded the national average over the past four years, helping to narrow the state�s unemployment rate gap with the nation. As one would expect with higher average unemployment rates across the state, wage growth in the state of California has largely underperformed the nation in this expansion, rising at an average annual pace of only 1.7% compared to the U.S. average of 2.1%.

But that is where the bad news ends. California is also seeing a marked acceleration in average hourly earnings growth over the past 12 months. A tighter labor market across the state does appear to be an important factor. Through July, average hourly earnings in California were up 2.5% (See Figure 2) from a year ago - well above the state�s expansion average.

Many California metro areas are doing much better than that over the past year. The San Francisco-Oakland-Fremont metro area, with an unemployment rate of only 4.0%, saw 5.0% average hourly earnings growth over the past 12 months. Wage growth in Los Angeles-Long Beach-Anaheim and San Diego-Carlsbad is also above the state and national averages at 3.3% over the past year, as unemployment in both those metropolitan areas is also a bit below the national average now. So we do see correlation between metros with below-average unemployment rates sporting faster average hourly earnings growth.

Figure 2

This is not always the case, however. Earnings growth has slipped in the San Jose metro area to 2.0% despite a low 4.0% unemployment rate. Other areas with high unemployment rates like Fresno, Salinas, and Oxnard are seeing the opposite effect -- robust earnings growth despite unemployment rates above the state and national average. So a low unemployment rate doesn�t necessarily guarantee higher earnings growth in California.

There also has to be the right mix of industries and jobs in the area. When you break down earnings growth by industry, the missing piece of California�s earnings picture emerges. Industries such as leisure and hospitality, trade and transportation, construction, and professional and business services are seeing outsized average hourly earnings growth over the past year. (See Figure 3)

Figure 3

This may explain much of the earnings outperformance from metros like Fresno, Salinas, and Yuba City despite their high unemployment rates. Many of these industries, such as leisure and hospitality and trade and transportation, have lower average earnings to begin with, so outsized percent gains may be easier won. In contrast, the San Jose-Sunnyvale-Santa Clara metro area -- with a large concentration of jobs in information services, where average hourly earnings are the highest and growth rates have turned negative over the past 12 months -- appears to be struggling to grow earnings despite a 4.0% unemployment rate. This highlights an important point, when it comes to a region�s average wage growth, industry concentrations and changes in a region�s industry mix over time can have important impacts on a region�s average earnings growth no matter how much slack is visible in the labor market.

What does this all mean for the average worker household?

In short, California, along with the nation, appears to be turning the corner on sluggish wage growth that has been endemic during this economic recovery, so far.

Lower unemployment rates finally appear to be helping to lift average hourly earnings of employees in many California metro areas, while better financial conditions in industries such as construction, professional and business services, leisure and hospitality, and trade are certainly helping lift average hourly earnings in California metros that up until now have largely been left behind as Silicon Valley wages have soared.

Dr. Scott Anderson, a member of the Treasurer’s Council of Economic Advisors, is Executive Vice President and Chief Economist at Bank of the West. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California.