American labor dynamics deteriorated further for the week ending April 18 as 4.427 million workers filed initial jobless claims, implying that the near real-time unemployment rate has increased to 21.1% at a minimum.
A looming issue is if wage deflation will become one of the major policy challenges ahead.
Over the past five weeks, the U.S. economy has shed 26.45 million jobs, which is larger than the 21.6 million jobs added during the 2010-2020 business cycle. Roughly one in seven of the 162.9 million workers in the U.S. labor force is now out of work.
Continuing claims for the week ending April 11, which are reported with a one-week lag relative to first-time jobless claims, increased by 15.97 million. The top-line data observed today will feed into the May U.S. employment report that will be published on June 5.
The magnitude of the shock to the labor market is so large that it is difficult not to begin thinking about the wage picture for American workers going forward. During the previous business cycle, wage growth was sluggish. Using the employment cost index as the benchmark, wage growth peaked at 2.8% in December 2018, which was disappointing relative to other business cycles.
The primary reason was what one would refer to as nominal downward wage rigidity, or how firms respond to declines in demand. If employers are unwilling or unable to reduce wages in dollar terms, they have to reduce the number of employees, which in turn causes rising unemployment, declining output and “pent-up deflation.” In our estimation, it was pent-up deflation that damped wage growth during the longest cyclical expansion in American history.
Early in the current recession, one of the major questions that has to be answered is will nominal downward wage rigidity limit outright deflation in the coming year? Alternatively, is the magnitude of the shock so large, and long lasting, that wage deflation will be one of the major economic narratives and policy challenges ahead?
While we anticipate a quotient of wage stickiness among the two lower quintiles of income earners, it is difficult to believe that there will not be significant wage flexibility up the income ladder that will result in wage deflation and an outright decline in the overall level of prices over the next two years.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
