Predicting wage growth with measures of labor market slack: It’s complicated
Josh Bivens, Director of Research
Why have wages grown so slowly in recent years despite relatively low unemployment rates? This puzzle has dominated economic commentary.
Figure A below, for example, shows a scatterplot of quarterly nominal wage growth (measured against the same quarter in the previous year) and unemployment rates since 2008. The trendline showing the relationship between these variables demonstrates it’s very weak—both statistically and economically insignificant.
Unemployment does not predict wage growth after 2007 : Unemployment rate and annual change in nominal wage growth, 2008–2018
| UR | NWC | |
|---|---|---|
| 2008-Q1 | 5.00% | 3.81% |
| 2008-Q2 | 5.33% | 3.65% |
| 2008-Q3 | 6.00% | 3.73% |
| 2008-Q4 | 6.87% | 3.88% |
| 2009-Q1 | 8.27% | 3.61% |
| 2009-Q2 | 9.30% | 3.10% |
| 2009-Q3 | 9.63% | 2.72% |
| 2009-Q4 | 9.93% | 2.62% |
| 2010-Q1 | 9.83% | 2.49% |
| 2010-Q2 | 9.63% | 2.50% |
| 2010-Q3 | 9.47% | 2.32% |
| 2010-Q4 | 9.50% | 2.20% |
| 2011-Q1 | 9.03% | 2.15% |
| 2011-Q2 | 9.07% | 2.09% |
| 2011-Q3 | 9.00% | 2.08% |
| 2011-Q4 | 8.63% | 1.82% |
| 2012-Q1 | 8.27% | 1.52% |
| 2012-Q2 | 8.20% | 1.55% |
| 2012-Q3 | 8.03% | 1.42% |
| 2012-Q4 | 7.80% | 1.45% |
| 2013-Q1 | 7.73% | 1.92% |
| 2013-Q2 | 7.53% | 1.90% |
| 2013-Q3 | 7.23% | 2.13% |
| 2013-Q4 | 6.93% | 2.32% |
| 2014-Q1 | 6.67% | 2.35% |
| 2014-Q2 | 6.20% | 2.39% |
| 2014-Q3 | 6.07% | 2.36% |
| 2014-Q4 | 5.70% | 2.13% |
| 2015-Q1 | 5.53% | 1.89% |
| 2015-Q2 | 5.43% | 2.06% |
| 2015-Q3 | 5.10% | 2.03% |
| 2015-Q4 | 5.03% | 2.33% |
| 2016-Q1 | 4.93% | 2.45% |
| 2016-Q2 | 4.90% | 2.45% |
| 2016-Q3 | 4.90% | 2.53% |
| 2016-Q4 | 4.77% | 2.42% |
| 2017-Q1 | 4.60% | 2.33% |
| 2017-Q2 | 4.37% | 2.30% |
| 2017-Q3 | 4.30% | 2.38% |
| 2017-Q4 | 4.13% | 2.33% |
| 2018-Q1 | 4.07% | 2.50% |
| 2018-Q2 | 3.90% | 2.71% |
| 2018-Q3 | 3.80% | 2.83% |
| 2018-Q4 | 3.80% | 3.25% |
Note: Data are quarterly, with nominal wage changes measured from the same quarter in the previous year.
Source: Unemployment rates are from the Bureau of Labor Statistics (BLS) Current Population Survey and wages are the average hourly earnings of production and nonsupervisory workers from the BLS Current Employment Statistics.
In this newsletter, I address a number of questions raised by this weak relationship between unemployment rates and wage growth since 2008. My key conclusions are:
- Since 2008, the share of adults between the ages of 25 and 54 who are employed (or the “prime-age EPOP”) has predicted wage growth better than the unemployment rate.
- But even the prime-age EPOP has done a poor job at predicting wage growth since 2008 compared with both its own predictive power pre-2008 and the predictive power of the unemployment rate in earlier periods.
- The prime-age EPOP’s advantage in predicting wage growth seems to have started even a bit before the Great Recession, around 2001.
- Because both the unemployment rate and the prime-age EPOP have seen a large reduction in their predictive power regarding wage growth since 2008, efforts to explain this decline in predictive power should involve looking to the unique features of the Great Recession: very high rates of unemployment combined with very low rates of inflation.
- While both the unemployment rate and the prime-age EPOP are likely to be fine statistical predictors of wage growth moving forward, there has been a steady decline in how responsive wage growth is to a given change in either. In short, workers have seemingly needed ever-tighter labor markets (measured by quantity-side variables like the unemployment rate and the prime-age EPOP) to generate a given amount of wage growth.
Higher returns on education can’t explain growing wage inequality
Steep and rising wage inequality is too often blamed on growing demand for workers with higher levels of educational attainment—the more schooling you have, the more you’ll be paid. But our research shows the rising gulf in pay has little to do with rising returns to education.
A prevalent story explains wage inequality as a simple consequence of growing employer demand for skills and education—often thought to be driven by advances in technology. According to this explanation, because there is a shortage of college-educated workers, the wage gap between those with and without college degrees is widening. The expected boost to workers’ pay from a four-year college degree is known as the “college premium.”
Despite its great popularity and intuitive appeal, this story about recent wage trends driven more and more by a race between education and technology does not fit the facts well, especially since the mid-1990s. The growing inequality of note is that between the top (or very top) and everyone else. The pulling away of the very top cannot be explained by education differences, but rather the escalation of executive and financial sector pay.
Even when looking at the relative changes in the 95th percentile of wage earners compared to the 50th percentile of wage earners, and comparing that gap with the college wage premium from 2000 to 2018, it is clear that gains in the college wage premium have been very modest and far less than the continued steady growth of the 95/50 wage gap. Therefore, it is highly implausible that the growth of unmet employer needs for college graduates has driven wage inequality.
The evidence suggests the demand for college graduates has grown far less in the period since the mid-1990s than it did before then. This is difficult to square with contentions that automation or changes in the types of skills employers require have been more rapid in the 2000s than in earlier decades. Rather, automation has been slower in the recent period than in earlier decades as seen in the pace of productivity, capital, information equipment, and software investment—and in the speed of changes in occupational employment patterns.
A close look at recent increases in the black unemployment rate
Everything from weather to furloughs made it hard to draw any major conclusions from this month’s employment report, but one recent worrisome trend persisted—a continued increase in unemployment for black workers.
The Labor Department’s February employment report showed job growth effectively stalled last month, rising just 20,000. That was much lower than anticipated and substantially weaker than the prevailing trend of the last few years. The average over the last three months came in at a more solid 186,000, likely a better reflection of underlying trends, given the unusually harsh weather in February. At the same time, wages grew 3.4 percent over the year, the highest so far in the economic recovery from the Great Recession.
Turning to the separate household survey, the unemployment rate ticked down to 3.8 percent, while the labor force participation rate and the employment-to-population ratio (EPOP) held steady. The overall unemployment rate has sat at or below 4.0 percent for the last 12 months, averaging 3.9 percent over the year. The black unemployment rate, on the other hand, averaged 6.4 percent over the last year and has been increasing in recent months. For comparison, white unemployment tracked the drop in overall unemployment in February and has averaged 3.4 percent over the last year.
What to Watch on Jobs Day: Stronger wage growth as prime-age labor force participation continues to climb
Wage growth has continued to be the number one indicator to track in the monthly jobs report. Nominal wage growth has been slowly climbing over the last several months. Over the last three months, year-over-year wage growth averaged 3.3 percent, up from 3.2 percent the prior three months, and 2.8 percent the six months before that. Wage growth has still yet to reach levels fast enough—and for long enough—to reach full employment and restore labor’s share of corporate-sector income. At the pace of growth we’ve seen in recent months, however, I’m optimistic that the economy will continue on track toward genuine full employment.
One of the reasons I’m optimistic is that more and more workers are returning to the labor force. And, the vast majority of the newly employed are coming from out of the labor force, so lots of those workers who have (re)entered the labor force are getting jobs. I’m unconcerned by the slight increase in the unemployment rate over the last couple of months. The unemployment rate has sat at or below 4.0 percent for nearly a year. As the labor force participation rate continues to recover, the unemployment rate may rise, but those increases will be for the right reasons as more workers grow optimistic about their chances in the labor market.
In the figures below, I take a closer look at the labor force participation rate and the share of the population with a job. I’m going to focus on trends in the prime-age population, with attention to 25- to 54-year-olds to remove any possible confounding factors due to retiring baby boomers at the top end or longer years of schooling at the bottom end. The figure below shows the prime-age labor force participation rate (LFPR) in blue and the prime-age employment-to-population ratio (EPOP) in green. The prime-age LFPR is the share of the prime-age population either with a job (employed) or actively looking for work (unemployed). The prime-age EPOP is the share of the prime-age population with a job (employed). The denominator is the prime-age population for both lines and the space in between can be roughly thought of as the unemployment rate. (Technically, the unemployment rate is 1 – EPOP/LFPR and the space between the lines is the number of unemployed people as a share of the population, but they track each other well.)
Record U.S. trade deficit in 2018 reflects failure of Trump’s trade policies
The U.S. Census Bureau reported that the U.S. goods trade deficit reached a record of $891.3 billion in 2018, an increase of $83.8 billion (10.4 percent). The broader goods and services deficit reached $621.0 billion in 2018, an increase of $68.8 billion (12.5 percent). The rapid growth of U.S. trade deficits reflect the failure of Trump administration trade policies, as well as the negative impacts of tax cuts and spending increases, which have sharply increased the federal budget deficit, and tightening of U.S. monetary policy, resulting in upward pressure on interest rates and the real value of the dollar.
The IMF predicts that the U.S. current account deficit—the broadest measure of U.S. trade in goods, services, and income—will nearly double between 2016 and 2022. Unless these trends are offset by a rapid decline in the value of the U.S. dollar, rapidly rising trade deficits could be devastating for U.S. manufacturing, likely giving rise to massive job loss on the scale experienced in the 2000–2007 period, when 3.5 million U.S. manufacturing jobs were lost.
The U.S. goods trade deficit with China reached a new record of $419.2 billion in 2018, up from $375.6 billion in 2017, an increase of $43.6 billion (11.6 percent). United States trade with China is dominated by the deficit in manufactured products. Although the United States has imposed tariffs of 10 to 25 percent on $250 billion in imports from China (about half of total U.S. imports from that country), China has played its ‘ace-in-the-hole’ by allowing it’s currency to fall by roughly 10 percent against the dollar. As a result, the U.S. trade deficit with China increased faster (11.6 percent) than the U.S. deficit with the world as a whole (10.4 percent). While the United States and China are poised to negotiate a deal to end their trade dispute, the proposed deal amounts “much ado about nothing much,” as Paul Krugman puts it. It will do little to reduce the massive imbalance in U.S.–China trade flows.
When will ‘Buy American’ really mean buy American?
Our government’s procurement policy falls far short of its potential to encourage and support good jobs in domestic manufacturing. We need to strengthen domestic sourcing requirements for publicly funded programs, including those intended to repair our failing infrastructure. While the recently issued “Executive Order on Strengthening Buy-American Preferences for Infrastructure Projects” is an improvement over the status quo, it falls far short of making the substantive improvements that are needed to make sure that “Buy American” actually means buying American.
To begin, the EO does nothing to strengthen domestic content requirements that agencies use to determine if a good is “domestically sourced”—that is, actually made in the United States. Many Americans would be startled to learn that a product requires only 51 percent U.S. content to be considered domestically made under the Buy American Act, which applies to federal government procurement. This does not even take into account the substantial transformation test, when a product is deemed domestic even if it is “made at least in part from materials manufactured in another country,” a special concern for the federal government’s procurement of the equipment and construction materials that are required for infrastructure projects.
In contrast, the Federal Trade Commission requires that the entire product be made substantially domestically in order to satisfy its definition of “Made in the U.S.A.,” although much more must be done to ensure that the FTC rules are effectively enforced.
There’s nothing radical about Elizabeth Warren’s proposal for universal childcare
The right-wing punditry machine has gone into full spin cycle as Democratic presidential candidates throw their hats into the ring, ready to brand any initiative that might ameliorate the lot of working families as radical or, worse in American political parlance, “socialist.”
That has certainly been the case with Senator Elizabeth Warren’s proposal for universal child care. But there’s nothing radical or socialist about her plan, which represents a sensible, evidence-based, practical, and much-needed strategy that tackles several critical national crises in one neat package. And it doesn’t even take money away from the GOP’s sacred cows of military spending and border security.
What crises do Warren’s proposal address? Let’s review:
First, and perhaps foremost, the majority of American families currently struggle to get their young children into child care that is decent, let alone of high quality. And for a substantial subgroup in the bottom quintile of the wage distribution, “struggle” is an understatement. For example, a 2015 EPI study showed that a single parent with one child who worked full-time for the minimum wage would not be able to sustain a modest but adequate lifestyle due to the high cost of child care.
Warren’s plan, which would make high-quality care free for families living at up to 200 percent of the federal poverty line and institute a sliding scale above that, with no family paying more than seven percent of their income, would do away entirely with that problem. Families that currently must choose among rent, food, and keeping their toddlers safe can now have all three, and middle-class families can invest in other child development activities and resources. Sounds a lot better than a wall already.
Stark black–white divide in wages is widening further
One of the most striking features of U.S. racial inequality is just how stubborn the wage gap between black and white workers has remained over the last four decades.
That trend was evident in EPI’s new State of Working America (SWA) Wages report, which highlights trends in wages across the wage distribution, by education, as well as by gender, race, and ethnicity.
Overall, the findings indicate wages are slowly improving with the growing economy, but wage inequality has grown and wage gaps have persisted, and in some cases, worsened. In this post, I will highlight one particular worsening wage gap and look at it from multiple dimensions. Since 2000, by any way it’s measured, the wage gap between black and white workers has grown significantly.
The findings here support the important research by Valerie Wilson and William M. Rodgers III, which shows that black–white wage gaps expanded with rising wage inequality from 1979 to 2015. Where their report is incredibly comprehensive, the trends outlined here are rudimentary, but reinforce the same basic truths.
In the figure below, I’ve collected some of the main findings on the black–white wage gap found both in the latest SWA report as well as the SWA data library. Using various measures, I compare wages for black and white workers over the last 18 years, highlighting the gaps in wages in 2000, the last time the economy was closest to full employment, 2007, the last business cycle peak before the Great Recession, and 2018, the latest data available.
Against these benchmarks, I illustrated the growth in the average gap; the gap for low-, middle-, and high-wage workers; the gap for workers with a high school diploma, a college degree, and an advanced degree; and a regression-adjusted wage gap (controlling for age, gender, education, and region).
Black women’s labor market history reveals deep-seated race and gender discrimination
The black woman’s experience in America provides arguably the most overwhelming evidence of the persistent and ongoing drag from gender and race discrimination on the economic fate of workers and families.
Black women’s labor market position is the result of employer practices and government policies that disadvantaged black women relative to white women and men. Negative representations of black womanhood have reinforced these discriminatory practices and policies. Since the era of slavery, the dominant view of black women has been that they should be workers, a view that contributed to their devaluation as mothers with caregiving needs at home. African-American women’s unique labor market history and current occupational status reflects these beliefs and practices.
Compared with other women in the United States, black women have always had the highest levels of labor market participation regardless of age, marital status, or presence of children at home. In 1880, 35.4 percent of married black women and 73.3 percent of single black women were in the labor force compared with only 7.3 percent of married white women and 23.8 percent of single white women. Black women’s higher participation rates extended over their lifetimes, even after marriage, while white women typically left the labor force after marriage.
Differences in black and white women’s labor participation were due not only to the societal expectation of black women’s gainful employment but also to labor market discrimination against black men which resulted in lower wages and less stable employment compared to white men. Consequently, married black women have a long history of being financial contributors—even co-breadwinners—to two-parent households because of black men’s precarious labor market position.
Black women’s main jobs historically have been in low-wage agriculture and domestic service.1 Even after migration to the north during the 20th century, most employers would only hire black women in domestic service work.2 Revealingly, although whites have devalued black women as mothers to their own children, black women have been the most likely of all women to be employed in the low-wage women’s jobs that involve cooking, cleaning, and caregiving even though this work is associated with mothering more broadly.
Trump’s national emergency declaration over the border wall is dangerous and not justified by the facts
Where, exactly, is the national emergency?
Both houses of Congress have now passed appropriations legislation to fund the government for the fiscal year, and it’s become clear they will not provide President Donald Trump with the full $5.7 billion he requested to fund construction of a wall on the southern border.
Trump has been so desperate to fund his signature campaign promise that he’s gone so far as to shut down the government over it for over a month, which caused federal employees to suffer and billions of dollars-worth of economic losses. In response to failing to get the money from Congress, Trump is declaring a national emergency to achieve the same ends by different means.
An emergency declaration, the president hopes, will allow him to access alternative streams of funding that will go towards funding the wall’s construction. Reuters reports the Trump administration expects to be able to allocate about $7 billion from two defense funds and a Treasury forfeiture fund as a result of an emergency declaration. This would be an extreme step that is unjustified by the facts because there is no ongoing national emergency at the southern border under any reasonable definition of the term.
Many on the right and left are unhappy with the legislation passed by Congress. Some conservative pundits and advocates are unhappy that it does not provide larger funding increases for immigration enforcement, going as far as saying that it will lead to “open borders.”
Some progressive legislators and advocates are opposing the legislation because it funds too much immigration enforcement and does little to rein in Immigration and Customs Enforcement (ICE) and Customs and Border Patrol (CBP), especially in light of recent internal criticisms of mismanagement, abuses of detainees, and policies that are being challenged in the courts for being inconsistent with domestic and international law. (The Democratic legislators in opposition, however, do not support another shutdown, and prefer that Congress pass a continuing resolution that would keep the government funded at current levels.) Trump expressed displeasure even before the legislation passed, noting earlier this week that the provisions included were “not doing the trick.”
