While most labor market indicators point to an economy near full employment, a notable exception is the sluggish rise of wages.
– Mary C. Daly, Bart Hobijn, and Benjamin Pyle
However, this slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labor market. In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs. Together these two changes have held down measures of wage growth.
Improvements in labor market indicators such as job growth and the unemployment rate are strong signals that the U.S. economy is returning to health. One puzzling exception has been the sluggish rise in wages. While wage growth typically rises as unemployment falls, this relationship has been muted in the current recovery. In this Economic Letter, we show that changes in the composition of the workforce propped up wages during the recession, despite a significant increase in labor market slack. As the labor market has recovered, this pattern has reversed. We find that cyclical components, such as the entry of low-wage workers to full-time jobs, have combined with secular components, specifically the exit of higher-wage retirees, to hold down recent measures of overall wage growth.
The recent wage growth conundrum
Standard economic theory tells us that wage growth and unemployment are intimately linked. Wage growth slows when the unemployment rate rises and increases when the unemployment rate falls. The experience since the Great Recession has been very different. Figure 1 shows overall wage growth averaged across four standard measures: average hourly earnings, the employment cost index (ECI) for wages and salaries, median weekly earnings, and compensation per hour. This average wage growth slowed much less than expected during the recession and has stayed relatively flat during the recovery. Even now when most measures of the labor market signal full employment, wage growth has lagged. Average wage growth across the four measures has been hovering around 2¼% for the past two years, significantly below the 3¼% average rate of wage growth from 1983 to 2015. The picture is similar for each measure of wage growth separately (not shown).
Average of four major wage measures
Note: Four-quarter log change, four-quarter moving average.
The Koyaanisqatsi Economy
– Raúl Ilargi Meijer
(…) The ever richer rich cannot spend enough to keep things moving. They can buy stocks and bonds and houses, but they can’t buy all the groceries and clothing that the poor and middle class no longer can. But it’s those things that keep the economy humming along.
An economy as unbalanced as the one we presently have is bound to perish. The rich are killing their own economies by trying to get richer all the time. And they have no idea that’s what happens. It’s sort of baked into their understanding of what capitalism is. Or neo-liberalism if you want. …
(…) What happens is that just as we find ourselves in a stagnating/shrinking economy, the rich get richer fast. They can do that because central banks are releasing trillions of dollars in QE, but also because the system is geared towards eviscerating the poor, and increasingly the middle class as well:
And this is amplified by the ultra-low rates policies central banks have been pushing over the past decade. They allow for the ever poorer to keep up appearances of wealth by plunging into debt ever deeper, but they don’t allow for their living conditions, their jobs, their savings, their pensions, to recover. They do the exact opposite. …