Sluggish Wage Growth, Trend or Cycle?

The suggestion that wages have not kept time with costs, even as unemployment has continued to decline is unlikely to surprise anyone, such as the following commentary in the Economist:

Low unemployment means that employers have to try harder to find new workers, while existing workers can threaten to move elsewhere. As a result, workers should be able to demand higher wages. Yet firms in America seem not to have got the message. Inflation-adjusted wages for typical workers are stagnant. In fact, they have barely grown in the past five years; average hourly earnings rose 2% year-on-year in February of 2015: about the same as in February of 2010.

FRED demonstrates this same wage data as a trend, that since the 1980’s has diverged from GDP. The graph below shows the same data as comparative indexes where “it’s immediately apparent that the GDP figure is now higher than wages, meaning that it has grown faster since the 1980s:”

The post notes this caveat when trying to aggregate wages:

It’s not totally obvious how we should define wages—because wage dynamics change so much over the distribution. Low, medium, and high wages have grown at different rates and at different times. From a macroeconomic perspective, however, it makes some sense to measure the average wage. The effect of so doing is that we put more weight on the higher earners than the average person, a result of a positively skewed wage distribution. (Recall the definition of skewness: Here, it means the top tail can pull up the mean past the average person’s wage, the median wage.)

But why? According to the same post, both GDP and BLS data “plummeted in the Great Recession, but since then have been growing at about the same pace. The decline in wages as a fraction of GDP is not a result of a sluggish recovery from the Great Recession, but rather from effects predating it.” This still does not explain why, but more or less, what has happened. Again, the same post in the Economist suggests a “wage hangover,” where “firms preferred to return to more normal management conditions, and to let too-high wages adjust over time: “pent-up” wage cuts have been achieved simply by not granting raises. Wages, in other words, are not rising by more because in many cases they are already too high.” Wow! That is so simple yet reasonable, it may very well be a significant factor contributing to this trend. Another factor cited is what many of us know anecdotally as well as from the data: “part-time for economic reasons” and other forms of un- or under employment.

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