Must-Read: I think that the odds are very high that Adam Ozimek is right here. But when I have to teach my students and write my articles in the future, how am I going to explain the Federal Reserve’s attachment to the unemployment rate as its single sufficient statistic for the state of the labor market in spite of all the evidence that it is not?
Adam Ozimek: There Is No U.S. Wage Growth Mystery: “Economists… puzzled over U.S. wage growth… wondering why it has been so slow despite a labor market that is allegedly back to or close to full employment… https://www.economy.com/dismal/analysis/datapoints/296127/There-Is-No-US-Wage-Growth-Mystery/
…However… there is no mystery: Wage gains are right where they should be. And… the labor market has room to improve. Starting early in 2014, economists and pundits began debating the wage growth “mystery.” If unemployment has fallen so much (at the time, unemployment had fallen below 6%) then why hasn’t wage growth picked up?… However, there really is no wage puzzle [if] you… look at the right numbers…. [Make] sure you are looking at the right measure of wage growth… the employment cost index…. The performance of the economy over the last few years has resoundingly rejected the pent-up wage cuts, compositional changes, low productivity, and measurement problem theories of wage growth…. It’s time to put those theories to bed and consider that, in fact, labor slack was greater than the full-employment hawks thought….
The unemployment rate wage Phillips curve… wage growth… has tracked relatively close… from 1994…. However, it has indeed fallen short in recent years compared with the line of best fit…. [But] the unemployment rate is not the right measure of labor market slack…. The prime age non-employment rate… see[s] an even tighter wage Phillips curve… [and] wage growth is exactly where we would expect given the level of slack in the labor market….
Whether you use the unemployment rate or prime non-employment Phillips curves, both suggest there is room to improve. The unemployment rate Phillips curve fails to explain the last two years of wage growth. The prime non-employment rate curve in contrast suggests wage growth should be exactly where it is…. Wage growth is not really that mysterious if this level of slack is correct. Labor market pessimists who have pivoted from one theory to the next only to see them debunked by subsequent economic performance should consider the parsimonious explanation that there remains slack in the labor market, and they have underestimated it for years…