The Forgotten Reason Behind Low Wage Growth

There are many questions about the labor market that remain unanswered. Why is the labor force participation rate so low, why are employers complaining about talent shortages, why aren't wages growing, etc.

In recent months, wage growth has begun to tick up. However, it continues to remain very low.

Some economists have attributed low wage growth to labor market slack.

But Wells Fargo economist John Silvia thinks this is only part of the story.

Another urban legend that does not fully capture the labor market of today is the assertion that weak wage growth has been due to a large amount of slack in the labor market. While an excess of labor relative to demand is indeed part of the slow wage growth story, a less cited reason is lower labor productivity in recent years. Wages are reflective of the marginal product of labor. Therefore, lower labor productivity is typically accompanied by weaker income growth, as illustrated in the bottom chart during different eras of productivity growth.

During the post 2005 period, productivity gains and real income gains are fairly matched - as they have been in prior periods. What makes the current period interesting is that both productivity and income gains are low and are reminiscent of the adjustment challenges in the U.S. economy during the oil embargo era. A similar, non-oil, adjustment is going on today.

Another piece of the U.S. labor market puzzle.