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Why workers aren't getting bigger paychecks despite sizzling jobs market

MarketWatch logo MarketWatch 6/2/2017 Jeffry Bartash

Video by CNBC

The U.S. has created more than 16 million new jobs since 2010 to push the unemployment rate down to a 16-year low, but the strongest labor market in years still hasn’t translated into much bigger paychecks for Americans workers.

The government on Friday said hourly pay rose at a 2.5% pace in the 12-month period ending in May, unchanged from the prior month and down from a postrecession peak of 2.9% at the end of 2016.

By now, many economists had figured wages would be growing at 3% or more a year. After all, wages typically grow an annualized 3% to 4% when the economy is strong and the unemployment rate is as low as it is now at 4.3%.

Economists offer several theories for the apparent break from past wage trends.

One argument that’s become more popular lately points to low productivity — a measure of how many goods or services an employee provides in an hour of work.

When workers produce more in the same amount of time, they enable a company to make higher profits and in turn allow them to raise wages. Yet productivity has been notably weak during the current eight-year expansion.

“Although average hourly earnings are rising only about 2.5% per year, slower than before the crisis, much of that downshift may reflect the slowdown in productivity growth we have experienced,” said Federal Reserve Gov. Jerome Powell in a speech on Thursday.

Read: Retail carnage continues as sector’s job growth falls for fourth straight month

Taking it a step further, chief economist Stephen Stanley of Amherst Pierpont Securities argues that pay is actually rising relatively rapidly if low productivity is taken into account.

“In a world of 1/2% per year productivity growth,” he wrote in a note to clients on Friday, “2 1/2% average hourly earnings growth is not nearly as bad as it sounds.”

Some economists also point to rising costs of benefits such as health care as a brake on take-home pay. If companies have to pay more to insure their employees, they’ll offset the cost by raising wages more slowly.

More global competition than ever is another well-worn argument. Companies may be too afraid to take on added labor costs for fear of losing out to domestic and foreign rivals who pay workers less.

Another possibility: Many U.S. workers, especially those still looking for jobs, lack the necessary skills to warrant higher pay. As a result companies have to pay more to train new or future employees who won’t be as productive when the first start out.

With unemployment so low, though, and a growing dearth of skill workers available for hire, companies face greater pressure to raise wages to attract or retain employees. A recent survey by the Federal Reserve found widespread labor shortages.

In one case, a Chicago manufacturer found that it could attract good job candidates and hold on to to talented employees by boosting wages by 10%.

Such pay hikes, however, are still the exception and not the norm.

In other cases, companies are “using technology whenever possible to substitute for labor,” the Fed said.

Some fast-food restaurants, for example, are resorting to automated order kiosks in part to offset costs from recent increases in minimum wages. Financial companies are also using more technology to serve investors and banking customers.

So far the approaches taken to constraining wage growth appear to be working. As the Fed pointed out, pay continues to rise modestly despite the tightest labor market in at least a decade.

Related gallery: 17 reasons why you should care about May's job report (provided by 24/7 Wall St.)

<p>The economy generated 138,000 jobs in May, marking the 80th consecutive month of job growth, though Friday’s number represented a downshift in the pace of job creation. The unemployment rate was 4.3% for the month.</p><p>The May jobs numbers are a disappointment, especially after following a robust jobs report for April. Economists were expecting a nonfarm payrolls gain of 185,000 in May alongside a steady unemployment rate of 4.4% and a 0.2% increase in average hourly earnings.</p><p>Employment in health care rose 24,000 in May, with mining adding 7,000 jobs, and professional and business adding 38,000 positions. Employment in food services and drinking places also showed increases of 30,000.</p><p>Among other data, the closely watched labor force participation rate declined by 0.2 percentage point to 62.7% in May. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May. Average hourly earnings for all employees on private nonfarm payrolls rose last month by 4 cents to $26.22.</p><p>Even though the jobs report did not meet expectations, the May figure was still strong enough to absorb new workers entering the labor force, based on Fed projections. The job figures point to a likely increase in the Federal Reserve’s benchmark rate when the Fed meets later this month.</p><p>24/7 Wall St. reviewed data released on June 2 in the Bureau of Labor Statistics monthly report, “Employment Situation Summary.” Data by each of the breakouts listed here are published monthly by the BLS. The amount of time people have spent unemployed, average wages, and weekly hours worked, also came from the BLS.</p><p>These are the numbers behind the April jobs report.</p> 17 reasons you should care about May's job report

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