Labor Market Expectations for 2018

By Richard Works

The markets in the United States appear to be booming. The value of household assets has been rising quickly. The stock market has recently experienced all-time highs. Household debt as a percent of disposal income has trended down. With all of these positive aspects, what might we expect for the labor market this year? This article will provide an overview of what professionals in the economic profession are suggesting for the New Year. Also discussed are recent observations in the evolution of employee benefits. The opinions found within this article do not necessarily reflect the views of the Bureau of Labor Statistics or any organization associated with the author.

Current Labor Market

The U.S. is benefiting from a strong labor market and loose financial conditions. The Congressional Budget Office (CBO) expects slack in the labor market to disappear as the growth of aggregate demand increases the demand for labor, thus eliminating the shortfall between actual and potential employment by the end of the year. The slack may continue as fewer people participate in the labor force compared to participation in an economy at full potential. As slack decreases, firms will compete for workers, thus hourly compensation should subsequently increase. The growth of hourly compensation would be the result of the increased demand for labor and competition for workers.

The difference between actual and potential rates of labor force participation should decrease with the unemployment rate continuing to fall. Nonfarm employment may have a slower increase because the number of people available to enter jobs may decrease as employment shortfalls shrink. In addition, the delayed retirement of baby boomers may likely delay growth in the labor force for new workers. Overall, the number of employed people as a percentage of the population will decline in 2018. However, the remaining effects of the previous recession and subsequent weak recovery may hinder labor participation despite declines in unemployment.

Employees May Need to Take Less Paying Jobs

On the other hand, improved hiring, possible employment growth, and rising wages may offset the effect of some of the factors that are pushing down labor force participation. Low inflation, however, may stagnate wage growth. A reduced unemployment rate indicates an increase in demand for labor. This demand may also encourage delayed retirement, thus increasing the labor force and lessening the decline in the unemployment rate. With demand for labor increasing, potential new employees may have to rethink strategy and possibly take less-paying jobs in order to work up to better positions in the future. The CBO projects that the employment cost index (measures change over time in labor cost) for private industry workers may increase.

Hiring is becoming more difficult and turnover is becoming high. Many people of working age are neither working nor looking for work. Contracting and freelancing will become more common due to the flexibility of working from home and workers making their own schedule. This practice has caused some changes in the corporate world as more organizations are allowing telework as an option. As trends in business change quickly, employees will need to adapt to various situations and increase specific skill sets. Such skills in high demand today are data science and computer programming. Networking is another major skill that potential employees will need to consider because referrals now fill many high-level positions in today’s economy.

The Impact of a Tax Cut on Wages

There has also been much talk about how a cut in the tax on capital might impact wages. After contemplating the economics, the theory shows that if the tax rate were one third, then every dollar of tax cut to capital on a static basis would increase wages by $1.50. If there are positive externalities to capital, then the effect will be larger than this amount. To put this in context, it is a combination of the standard result that in a small open economy, labor bears all of the small capital income tax, and that starting at a positive tax rate, the burden of a tax increase exceeds revenue collection due to the first-order deadweight loss. When the government cuts the tax rate on capital income, short-run government revenues fall and long-run wage payments increase. Therefore, a $1 cut in short-run annual government revenue yields a $1.50 increase in long-run annual wage payments. Harvard economist, Greg Mankiw, has provided the mathematical proofs on his blog that explains this in detail.

Changing Dynamics in Health Plans

Regarding employee benefits, economists are seeing ambiguity in benefit provisions. In addition to observing the changes in defined benefit pensions and hybrid retirement plans, we are also noticing changes in defined contribution plans, such as the 401(k). These changes encourage savings through automatic enrollment and escalation features. We also see changing dynamics in health plans where plan features between indemnity and pre-paid plan types continue to morph. The lines between plan types are becoming less meaningful in their distinctions—more focused on bigger needs, such as areas of choice/access or limits to coverage—than the concepts of pre-paid and indemnity. There is more blurring today in benefits and plan provisions, and economists expect this to continue.

Expect Increased Inflation

Home prices may increase between three to six percent with similar sales or slightly less as in 2017. However, some locations will retain stability and perform better than others perform. The volume of homes for sale has recently increased, but inflated prices due to inventory shortage will keep prices up in the early part of the year. With a tightening job market and full employment, economic theory says that inflation should start to increase. The Fed has targeted inflation at 2.0%, and with low rates, consumers and companies will borrow at low rates of interest, which will theoretically generate growth. However, as interest rates increase and valuations mature, the housing market will soften. Later in the year, valuations should reduce to a one percent increase. After the recent underperformance, the U.S. dollar should outperform other major currencies as interest rate differentials start to favor the U.S. market.

Dr. Richard Works, Economist
Bureau of Labor Statistics, Washington, DC