Economic Wage Growth: Want Higher Pay? Quit Your Job!

Herb Kelleher, a co-founder of Southwest Airlines, is a New Jersey native who transplanted to Texas.  He’s famous for drinking whiskey and smoking cigarettes, and has been known to use them as props when speaking in public.  When asked why he continued smoking since it is so bad for your health, he replied, “Because I don’t want to be known as a quitter!”

Quitting gets a bad rap, like when kids quit a sports team or music lessons, or we as adults quit working out.  But there are good times to be a quitter, particularly when it comes to employment.

People quit their jobs for a variety of reasons. Maybe they hate what they do, where they do it, or even who they do it with. But one of the best reasons to quit a job is to take another position with significantly higher pay. This helps both the employee and the economy, since it gives the worker more money to spend. Looking at the soft wage growth in the U.S., I think we need more quitters.

As the unemployment rate fell from 10% to less than 6% over the past five years, many analysts and even Federal Reserve Governors have been waiting for wage pressure to drive up earned income. They are certain that wage hikes are just around the corner, and their conclusion is based on sound logic. As more people find jobs there will be fewer potential employees competing for open positions. Employers will have to offer higher wages to attract the best candidates, thereby driving up incomes.

The only problem is that it hasn’t happened.  More people are working, but wages have remained somewhat flat.

Adjusted for inflation, average hourly earnings in the U.S. were $20.40 at the end of 2008. The rate moved up a bit in 2009, then fell to $20.06 by October 2012. Since then, wages have gradually gained ground, only surpassing the December 2008 mark in the fall of last year, and reaching $20.80 in January. Here we are more than five years later, and real average hourly earnings have only increased by 2% … not 2% per year, just 2%!

Without more income, consumers can’t grow their spending, which holds back the economy. But the reason for soft wage growth doesn’t lie with employers refusing to part with their profits, it lies with employees who aren’t demanding higher pay. In short, not enough workers are quitting for positions at new firms, resetting their base pay to higher levels.

Most people in private employment have dealt with increased responsibilities or other forms of promotion that did not come with a corresponding raise in pay.  A variation is that you were promoted and got a bump in pay of a few percentage points, but nothing close to what it would take to hire a new person to perform the job, or even what the last person in that position was taking home.

This anchoring of income to a person’s starting salary or wage when joining a company is common, and is what drives many people to leave their jobs — they can make significantly more at another firm, performing the same duties. The government generates a report that reflects the current number of people who are jumping ship.

The Bureau of Labor Statistics conducts the Job Openings, Layoffs, and Turnover Survey (JOLTS) every month. Part of this survey is the measure of how many people quit their job, which is an indication of economic strength. In the mid-2000s, the quit rate was around 2.8 million people on an annualized basis. As the economy slowed and then fell into recession, the quit rate fell, dipping to 1.6 million in 2009. Since then the quit rate has walked back up, but is still 10% shy of where it was in the mid-2000s.

We need more quitters! While the survey doesn’t ask why, there are a couple of obvious reasons people aren’t kissing their current employers goodbye.

The U.S. economy has improved over the last several years, but it’s hardly been a robust recovery.  Outside of the oil patch and some technology jobs that require specific degrees and certifications, businesses are still hesitant to hire or expand because they don’t see significant growth in demand.  Without that force pulling people through the system and opening up new positions, current workers don’t have the same opportunities they’ve had in prior years, so they are less inclined to take the leap.

What’s more, the age structure of our working population is shifting. The boomers aren’t quite ready to retire, but older workers don’t change jobs as often as younger workers. With fewer boomers making a move, there are fewer spots opening up for other workers, both new hires and professionals already within the organization.

No matter what the reason, with fewer people quitting for better opportunities, wage growth will remain subdued, which will keep a lid on inflation and hold back personal spending. This is bad news for young workers looking for their next raise, and is one of many reasons why we don’t see our economy reaching escape velocity anytime soon.

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Rodney

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Categories: Unemployment

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.