When Will Interest Rates Rise?
First Comes Jobs, and then Real Wages
But, Wage Inflation is a Function of Demographics
The Slow Growth in Working Age Population Limits the Labor Supply
Today, Annual Change in Prime Working Age Population (25 to 54 year olds) Is Similar
to the Early 1960’s - - Near Zero Growth

Growth in Employment, Given Limited Growth in Working Age
Population, Causes Inflation to Accelerate As Unemployment Drops
Below 5%, As Occurred in 1965 to 1967

An Increase in Employment with the Limited Labor Supply,
Accompanied by the Decline in the Participation Rate for 25 to
54 year olds, Increases Wage Inflation
Employment Population Ratio, 25 to 54 Year Olds, Rose to 77%
in December, 2014. A Ratio Above 78% Forecasts Inflation

What Caused the Stagnant Growth in Hourly Wages in the Last Decade?
Two Themes:
- Companies Outsourced Tasks Overseas
- Companies Automated Middle-Skilled Tasks
Over the Past Decade, These Two Themes Devastated Job Growth in the Middle-Skill Level with
Incomes $25,000 to $59,000 and Small Business Fell into Recession Lasting Through 2013
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
High-Skill Jobs
(over $60,000
Annual Salary)
Typically
Require Some
Post Secondary
Education
Low-Skill Jobs
Perform Non-
Routine Tasks
(Under
$25,000
Annual Pay)

The Small Business Index of Optimism First Peaked at
107 in 2003 and Ended 2013 at 94 – No Wonder
Middle-Skill Jobs Growth Fell 2.5% from 2003 to 2013,
While High and Low-Skill Jobs Grew at 15.8% and
15.7%, Respectively.

The Recovery in the Small Business Optimism Index
from 94 in 2013 to Over 100 at Year End 2014 Signals
a Major Change to the Positive
Interest Rates Rise in 2015 and Beyond as Middle-Skill Jobs Recover
The Slow Growth in Prime Working Age Population Accompanied by Job
Growth Creates Inflation in Coming Years
Real Wages Increase and Stimulate the Economy

Supporting Evidence
Labor Departments Monthly Report on Job Openings, Hiring and Firing
Indicates Employers have Lots of Openings they Need to Fill
Small Businesses Surveyed Expect to Raise Pay
One Giant Employer (Aetna) with 5,700 Middle-Skill Employees Set a
Minimum Wage of $16 an Hour ($33,000 per Year) to Retain Good
Employees and Recruit for Vacant Positions. Another Example of the
Increased Middle-Skill Job Growth and Higher Real Wages.
Home Building and Home Sales Rise in 2015-16 as Lending Standards
Relax with Lower Down Payments for Selected Borrowers, Real
Incomes Rise, and Mortgage Rates Remain Attractive.
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