U.S. labor market outlook

The outlook for U.S. wages is of central importance to investors given its implications for everything from corporate profits to policy rate expectations. The main reason for the lack of wage acceleration thus far in this cycle is the shape of the Phillips curve, rather than problems with variables that go into it, argues Societe Generale.

As shown in above chart, which captures the relationship between real wages and the employment gap, the U.S. economy has been operating on a dormant portion of the Phillips curve over the past five years, but appears to be close to an inflection point.

Of course, there are alternative explanations and in this note it is observed the thesis that low productivity growth is the culprit behind sluggish wage growth. If this were true, then adjusting the Phillips curve by productivity growth should produce a more consistent downward-sloping line. Although post-2009 data does exhibit a downward slope,  the curve has shifted outward relative to the pre-2009 period. 

"This suggests that US labor is actually more expensive in productivity adjusted basis. This finding would seem to fit well with the Beveridge curve which points toward labor market frictions, higher NAIRU and higher labor costs. But instead of getting compensated via higher wages, workers are getting compensated by working less hard, or in economist lingo, by being less productive", states Societe Generale.