Michael R. Strain: The Economics and Emotions Behind Slow Wage Growth: "why does wage growth continue to be so tepid? As unemployment falls and the number of open jobs increases, businesses should have to increase pay in order to attract increasingly scarce available workers as well as retain the employees they have...
...To some extent, reality is conforming to this story. But many who look at the numbers aren’t satisfied. So let’s discuss some possible explanations. One theory has been that there is more “slack” in the labor market than the unemployment rate would lead you to believe, since people who leave the workforce altogether are not counted as unemployed in the official statistics. If the severity of the Great Recession drove people out of the labor force (rather than simply into the ranks of the unemployed looking for work) but who might readily rejoin, then the jobless rate could be very low at the same time that there is enough slack to restrain wage growth.... More than 5 million people are not in the labor force but report wanting a job. We also saw some evidence consistent with hidden slack in Friday’s labor market report. The unemployment rate increased in June because around 600,000 people entered the labor force, but some were still searching for work at the time of the survey, and so were counted as unemployed. To some degree, the unemployment rate is overstating the health of the admittedly healthy labor market. Another possibility is that the composition of the work force is changing in ways that affect pay. There is evidence that higher-wage older workers have been retiring.... It’s also possible that businesses are competing for workers using levers other than wages.... Mary C. Daly and Bart Hobijn suggest another possible reason for restrained wage growth: Employers’ reluctance to reduce the wages of existing workers during the Great Recession may have created a backlog of wage cuts that must be worked through. They find that industries least able to cut their workers’ pay during the recession have also experienced slower wage growth during the recovery. I wonder how much of what we are seeing in wage statistics is driven by psychology and norms....
We should also admit the possibility that there is no problem to solve, no mystery to explain—that wages are growing in line with the economy’s overall performance. Moody’s Analytics economist Adam Ozimek finds that when you measure slack using the employment rate rather than the unemployment rate, wages are growing at a pace you would expect....
Wage growth is slower than we’d expect, and the reason is something of a mystery. Some combination of all the factors we’ve discussed is probably the culprit. This is good news, because it means that a healthy rate of wage growth is likely in the future. But let’s hope the future arrives sooner rather than later...
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