Not a Puzzle—Wages Growth is Sluggish Because Employers Hold All the Cards
Solid job growth but sluggish wage growth has been a constant refrain over the last few months. We’ve finally seen 12 consecutive months of job growth above 200,000, but wage growth shows little sign of accelerating. The question that everyone seems to be asking now is, when will wage growth pick up?
In the last couple of weeks, we’ve seen some employers take a step forward and make a choice to pay higher wages. Corporate profits are near all-time highs, so employers can pay their workers more without having to raise prices. They might even find that workers who are paid more have more company loyalty, leading to better recruitment and retention, and higher productivity. It’s a reminder that the path we’ve chosen—one where economic gains are disproportionately enjoyed by those at the top—is a choice.
Policy can help turn this around. Minimum wage increases across the country are a good example. In 2014, 18 states, where 47 percent of all U.S. workers reside, increased their minimum wage. And this change made a difference: while real hourly wages fell or stagnated across the board last month, low wage workers actually saw a modest wage increase.
So, policy matters, as does a tight labor market. And, today, while we’re solidly adding jobs, there is still tremendous slack in the labor market. There are nearly 6 million missing workers, who have yet to enter or return to the labor force. The quits rate has yet to recover; a larger number of people voluntarily quitting their jobs indicates a strong labor market—one where workers are able to leave jobs that are not right for them and find new ones.
In short, we’re still far enough away from full employment that additional fiscal stimulus would pay big dividends. This is unfortunately not on the table, politically speaking, though economically it would be relatively easy. But it’s important that policymakers—particularly those at the Federal Reserve—not put the brakes on the recovery prematurely. Nominal wage growth in February was 2.0 percent for the nonfarm private sector over the year, and an even lower 1.6 percent among production and nonsupervisory employees. As shown in the figure below, wage growth has been flitting around 2 percent for nearly five years now.
Nominal wage growth has been far below target in the recovery: Year-over-year change in private-sector nominal average hourly earnings, 2007–2015
|All nonfarm employees||Production/nonsupervisory workers|
* Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income.
Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series
The horizontal shaded area represents growth of 3.5 to 4 percent—nominal wage growth consistent with the Fed’s 2 percent inflation target and a stable labor share of income (given a range of 1.5 to 2 percent trend productivity growth). We need to see consistent wage growth above this range before we’ll see a hint of upward pressure on prices. In other words, the Fed should not even consider raising interest rates to forestall inflation until wage growth is consistently above this target. Consistently strong job growth will eventually lead to a tighter labor market that generates faster wage-growth, but we are not there yet, and policy should stay supportive of growth until we are.