The Flat-Paycheck Recovery

In every economic cycle, there’s a turning point, and for the U.S., it looks as though that will come in 2014. For the past five years, we’ve struggled through crisis and recession and a wimpy 2% recovery. That was technically good news but didn’t feel much like it, given that unemployment remained at record highs and wage growth was flat. Will that change this year? Yes–and no.

Unemployment figures are creeping down, reaching their lowest rates since 2009. Third-quarter 2013 GDP figures were revised up to a whopping 4.1%, which means job growth will likely continue. But the jobs being created aren’t like those we’ve lost. While two-thirds of the jobs lost during the recession were middle-income jobs, about half of those created since have been in low-wage sectors like tourism, hospitality and retail sales. What’s more, a greater proportion of them are temp positions than in recoveries past. The result is that although wage growth has begun to pick up a little bit, it’s far below what most economists would expect at this stage of a recovery. “America’s concern is no longer a jobless recovery but a high-wage-less recovery,” says Lindsey Piegza, chief economist for brokerage Sterne Agee.

In an economy that’s 70% based on consumer spending, that matters a great deal. If people don’t get paid more, they won’t spend more, and that will hold back private-sector growth. Government shutdowns, partisan politics and a global slowdown haven’t helped much either.

Low wages mean low inflation, which is something that the Federal Reserve will be watching carefully as it begins to “taper” back on its multibillion-dollar-a-month asset-buying spree, which pushed stock markets to record highs. Some economists believe that unemployment is falling not because of growth but because workforce participation is at a 30-year low, and that inflation should be higher before the Fed tapers more quickly. Others say the Fed’s $4 trillion buying program has created dangerous bubbles in areas like emerging markets, commodities, commercial real estate and even money markets and that the money spigot should be turned off faster. As it is, we could see a turn from the recent trend of soaring markets and sluggish growth. Tapering could mean flatter markets (or even corrections) as growth becomes more robust.

The most important question is, Will it feel that way to the average person? Certainly, the U.S. is doing better than most of the rest of the world. In the coming year, we will grow far faster than Europe, faster even than emerging markets such as South Africa, Brazil and Russia. The U.S. remains the prettiest house in the ugly neighborhood that is the global economy. But as behavioral economics tells us, our feelings are pegged not to the world but to our neighbors. Our economy remains bifurcated, with jobs for engineers and baristas but not enough in between. Whether that changes in 2014 will tell us a lot about the state of our country in the postrecovery era.