Where is the wage growth?

The lack of wage growth is on everyone’s mind these days. After the Bureau of Labor Statistics released data last week on the unemployment rate and job growth, the report was hailed as a sign of a steady and possibly strengthening recovery. But one variable stood out: the lack of wage growth. Over the past year average wage growth for all private-sector workers was 2 percent—just barely keeping up with inflation.

Catherine Rampell at The Washington Post considers a variety of reasons for this slow wage growth—a change in the quality of jobs created and a lack of job changing among employees, among them—but finds one more convincing than the others. She points to a considerable amount of slack in the labor market. Because many workers dropped out of the labor force, the decline in the unemployment rate—down 1.3 percentage points over the past year—overstates the extent to which the labor market has recovered, she argues

Justin Wolfers presents a related puzzle over at The Upshot. He looks at the historical relationship between the unemployment rate and average wage growth since the mid-1980s. What he finds is that the relationship appears to have changed in recent years. The decreases in the unemployment rate during the economic recovery from the Great Recession haven’t sparked the kind of wage growth we’d expect from previous data. According to Wolfers, this is a sign of considerable slack in the labor market.

Back at The Washington Post, Jared Bernstein looks at the relationship between wage growth and a more comprehensive measure of labor market slack developed by economist Andrew Levin of the International Monetary Fund and Dartmouth College. Bernstein finds that the decline in slack hasn’t sparked strong wage growth and that the relationship between slack and wage growth has weakened over the last 5 years.

Tim Duy, an economist at the University of Oregon, thinks that Wolfers’s puzzle, and by extension Bernstein’s findings, really isn’t all that puzzling. Duy looks at data going back earlier than Wolfers, including the business cycle of the early 1980s. He argues that the current recovery is very much in line with the experience of the early 1980s, the last severe recession the U.S. economy experienced. Duy then points out that this means the U.S. labor market has much less slack than Wolfers or others would have you believe. No need to worry about this time being different, the economy is still working along the same old rules, Duy is saying.

But it’s important to remember that the meager wage growth of recent years is just a continuation of a long-term trend highlighted by The New York Times’ David Leonhardt. Wage growth has been anemic for decades now. The forces behind this trend include globalization, technological change, changes in labor market institutions, and the inability of policymakers to run the economy at full-employment. Figuring out how to boost wage growth in the short-run and the long run is one of the most important challenges for researchers and policymakers.

October 7, 2014


Wage Stagnation

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