Economists are often wringing their hands over why, despite a continuous eight-year economic recovery, workers' wages remain largely stagnant, extending a trend that began some three decades ago.Yet anyone who has applied for a job in the last couple of years knows that, while the US unemployment rate is historically low at 4.4%, the labor market isn't exactly bustling.
Companies have become a lot more reticent about making new investments in the wake of the Great Recession and during the weak economic recovery that has followed it. That includes investing in people, and the hiring process has become slower and more onerous.
It also means wage increases have become even harder to come by.
The recession caused lasting damage to the job market which still resonates to this day. Steven Partridge, vice president for workforce development at Northern Virginia Community College (NOVA), says the crisis created what he calls "degree inflation" in job requirements - a trend correlated with stagnant and sometimes falling incomes as workers lost their jobs and considered themselves lucky to take lower-paying ones.
In other words, because applicants were so desperate and the pool was so wide, the bar for hiring became unrealistically, and often unnecessarily high. The trend has abated, but not fully receded.
"The downturn made everyone push up their education requirements," Partridge told Business Insider.
Several job market indicators point to underlying weakness - high levels of long-term joblessness, low labor force participation and, yes, a distinct lack of wage growth.
Albert Edwards, market strategist at Societe Generale, deserves credit for doing something that's rather rare on Wall Street - admitting he was wrong, specifically about the prospect of imminent wage increases.
"Talking about wrong, I have to put my hands up. I have been expecting US wage inflation to roar ahead over the past three months to well above 3%, yet every data release has surprised on the downside," he wrote in a note to clients.
"Wage inflation, as measured by average hourly earnings, has actually leveled off at close to 2-1⁄2% while wage inflation for 'the workers' is actually slowing (see chart below)! Strictly speaking, the workers are defined (by the BLS) as those who are not primarily employed to direct, supervise, or plan the work of others. Hey, thats me!"
Societe Generale
Fed officials have also struggled to understand the absence of wage increases. In a recent research brief from the San Francisco Fed, staff economist Mary Daly and co-authors reflect on what they see as a surprising trend.
"Standard economic theory tells us that wage growth and unemployment are intimately linked. Wage growth slows when the unemployment rate rises and increases when the unemployment rate falls," they write. "The experience since the Great Recession has been very different."
Federal Reserve Bank of San Francisco
"This slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labor market. In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs," they said. "Together these two changes have held down measures of wage growth."Their explanation provides little comfort in the face of the depressed labor market many Americans still face, especially lower-income and minority families.
The Fed authors also suggest a factor in low income growth that might ring true to those families: "As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time."
As suggested in that last excerpt, labor's bargaining power vis-a-vis employers is probably at least as important as unfavorable demographics in explaining slow wage growth. It will take a substantially stronger economy to tilt that balance back in workers' favor.