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Economy & Business Environment Blog

May
12
2017

Our unemployment rate is great, so why aren’t wages rising faster?

Authored by Gad Levanon and Brian Schaitkin.

Five years ago, an unemployment rate of 4.4 percent — which the latest jobs report shows — would have been unthinkable. The impact of the tighter labor market is noticeable in larger recruiting difficulties and higher quit rates, but so far low unemployment has not been sufficient to deliver the types of wage increases workers crave. Nominal wage growth has remained stubbornly below 3 percent. Adjusting for inflation, real wage growth remains below 1 percent. In fact, the last time workers truly had leverage to enjoy an extended period of real wage growth was during the halcyon days of the dot-com boom.

So what factors are preventing workers from securing wages in an environment that should be favorable to them?

First, worker sentiment indicators suggest that the labor market is as tight as it was at the end of the last expansion, but not tight enough to force more robust wage growth just yet. The “labor market differential” is a valuable measure derived from two questions in the Conference Board’s Consumer Confidence Survey. It is calculated as the difference between the share of respondents who believe jobs are plentiful and those who believe jobs are hard to get. This measure currently sits at a slightly higher level than right before the Great Recession, though still far below record high levels reached in 2000. Should the measure improve further, payrolls may well rise.

Moreover, measures of productivity and inflation also serve as key drivers of wage growth. Since 2005, average productivity growth (the amount produced by a worker per hour) has been considerably slower than during the period between 1997 to 2004. Slower productivity growth means firms are receiving lower returns per worker and therefore are unwilling to pay higher wages. A low inflation environment in recent years has also reduced the need of employers to compensate for increases in the cost of living, which contributed to lower wage growth.

The structure of the labor market has changed dramatically since 2000. More Americans work in these service sector jobs, which also lend themselves to more flexibility for employers in determining business location and tapping into many different pools of workers. With lower union membership rates, service-providing industries can utilize alternative work arrangements more. For example, the rise of contract labor has allowed firms to hire janitors, security guards, and other workers in non-core functions at lower costs. Also, the changing age composition of the labor force has held down wage gains as a large number of experienced and well-paid older workers are retiring.

Finally, it is important to remember that wage growth lags behind a tighter labor market, so the best of times for workers may well lie ahead. Unemployment fell below 5 percent in the middle of 2005, but it was only in the middle of 2007 that real wage growth moved above 1.0 percent. By this standard, faster wage growth could arrive at the end of this year or at the beginning of 2018.

The Atlanta Federal Reserve tracks wages of those who have remained employed for the past 12 months and that measure shows that wages started growing at a more rapid clip almost two years ago. Some of the workers rejoining the ranks of the employed now have spent years away from the labor market and therefore command lower wages, bringing down the overall average. With fewer workers left on the sideline though, employers will have increased difficulty filling vacancies. A seller’s market could well be on the horizon for workers soon, and with that a long sought after raise.

This piece originally appeared in “The Hill.”



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