NEW YORK – The labor market appears to be quite strong, judging by June’s unemployment figures. The rate ticked up in June to 4 percent, but that is still very low. It has been nearly two decades since the U.S. economy has had such little unemployment.
There are currently 6.7 million job openings – a record high. And the rate at which workers are quitting their jobs is higher than it was before the onset of the Great Recession. But wage growth is still noticeably slower than many economists and analysts expect (despite all the stories about employers desperate for workers).
So 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. And if workers are quitting voluntarily, it stands to reason that many of them are not only confident that they can get another job, but that it will be better and higher-paying as well.
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.
The rate of employment for people in their prime working years is still below its pre-recession peak, and many proponents of the “hidden slack” view point to this as evidence that the official jobless rate isn’t giving the full picture. I think there is something to this story, but it is becoming shakier over time. For one, it is not clear that the prime-age employment rate is below its long-run trend. In addition, the employment rate has been improving, which you might expect would spark faster wage growth than we are seeing.
Furthermore, other measures – in addition to those discussed above – point to a robust labor market, inconsistent with a decent amount of slack. These include a broader measure of worker underutilization that takes into account those who are working part time when they would rather be full time and some people who have left the labor force. In addition, monthly payroll gains have been consistently impressive.
Even with all of these positive indicators, 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, leaving the labor market, while lower-wage younger workers have been entering. This would slow overall wage growth. In addition, the gig economy may be holding down pay increases by creating a pool of workers outside the formal economy that employers know can be tapped if they need to hire.
It’s also possible that businesses are competing for workers using levers other than wages. For example, some employers are offering signing bonuses to attract workers. In addition, companies are making it easier for applicants to get their foot in the door – they are less likely to demand background checks, for example, which in effect increases the number of workers they can choose from, relieving some pressure to increase wages.
Economists 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. People who entered the labor market during and after the Great Recession have lived through some rough times and don’t have strong memories of better times. I’m sure many workers – both relatively new entrants and those with long experience – have had moments where they felt lucky to have a job at all. Even though the economy has been strengthening for years, are workers reluctant to go into the boss’s office and ask for a raise? Likewise, are employers used to resisting increases in their payroll obligations?
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.
Or consider a simpler calculation: Roughly speaking, wages grow if workers are more productive and if overall prices are increasing. Productivity growth has been lower this cycle than in the past, and based on its performance wage growth is only slightly slower than you’d expect.
These are compelling arguments, but I’m not sold. 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.
Michael R. Strain is a Bloomberg opinion writer.