By far the strangest and most interesting news of the day was the unexpected fall in Unit Labor Costs (-0.2% against an expected +0.2%). Since early 2014, ULC has been positively correlated with broad unemployment (U6, or unemployment, part-time for economic reasons and marginally attached to the labor force).
Normally (as during 2000-2014) labor costs are negatively correlated with unemployment. Perhaps the Phillips Curve has reversed direction?
There are any number of possible explanations for this, including
- a very low labor force participation rate that reflects a reserve of prospective workers;
- postponed retirement
- a cultural change in a labor force that is more concerned with job security than pay gains; and
- technological changes.
Whatever the reasons, the fall in labor costs is good for earnings, and helps explain the subdued wage costs we observed in the GDP profit tables:
There could also be other reasons. We have an odd culture where your FICO score is often called your "credit score". We have created multiple levels of debt, and when a person has a ‘weak" credit rating (remember your credit rating has NOTHING to do with your assets, FICO genrally does not even collect asset data only liability data).
We have a highly overleveraged economy, bringing in emigrants as we did in the past, but the new thing is the Government is providing the first level of income so that wages are simply a second level of income for many workers not the only income. Two wage earner families are now the norm. So there are up to three levels of "income" rather than only one.
I am convinced that there are deflationary forces at work here, that we do not fully understand yet. This s not an isolated instance. Labor costs are down worldwide.
First, the real unemployment rate is not 4%. Real unemployment was about 10% in 2001 and since the financial crisis, has been above 20% and is now at 21.7% so labor has no bargaining power. No mystery.
http://www.shadowstats.com/alternate_data/unemployment-charts