Labor market polarization could be a factor holding back confidence and keeping downward pressure on wage growth

Deep dissatisfaction with the labor market has been a hallmark of the current US economic recovery, as well as the previous ones since the 1990s. Despite significant improvement on a wide variety of other labor market measures such as the addition of 13mn jobs and a steep drop in the unemployment rate by half to 5.1% since the nadir of the crisis environment, this has not felt like a strong recovery to many. To a large extent, such sentiment may be the result of the changing and more "polarized" structure of the labor market.

Jobs in the middle of the skill distribution have yet to recover, even with consistent net improvement in employment at both the high and low-skilled end of the labor market. In other words, the polarization of the labor market, where middle-skill and middle-class jobs are hollowed out despite gains for high-skill and low-skilled jobs, has significantly diminished any sense of recovery.

The idea of labor polarization is not new, but it has felt more extreme in this cycle. Polarization, as Fed Chair Janet Yellen previously noted, helps to explain how zero may be the appropriate policy rate for such a lengthy period despite employment metrics that, on their face, would have implied non-zero rates long ago.

"We think it is a factor keeping the Fed on the sidelines for such a long time, thereby depressing US yields and helping delay the US dollar from reaching our expectation of further gains", BofA Merrill Lynch.