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For years, this has been the central question of the surprising recovery in the U.S. labor market: Why haven’t wages risen faster?
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What Happens To Wages During A Recession
Unemployment is low. The work was hard. Employers complain that they cannot find people to cover all the jobs they have. However, workers’ wages are rising steadily, outstripping inflation.
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The average hourly earnings in April was 3.2 percent higher than the previous year, marking the month of consecutive months in which growth increased by 3 percent, the Ministry of Labor said on Friday.
Other methods vary in the exact duration and rate of the increase, but not in the underlying trend: Wage growth, long held indiscriminately, is finally kicking into high gear.
“We spent many years, ‘Where is the wage growth? Where is the wage growth?'” said Martha Gimbel, an economist at the job search site Really “And it turns out that we have to wait a few years to strengthen the labor market.”
Thank you for your patience while we confirm access. If you’re in reading mode, log out and sign in to your Times account or subscribe to the entire Times. Real wage growth since the Great Recession has been sluggish. We show that the slack is mainly due to weak labor productivity growth and expected inflation. We also find that wage growth since the end of 2014 has been higher than would be consistent with labor productivity growth and inflation, and that this wage trend indicates an increase in the wage share of the labor force. We show evidence that this increase in labor share may be due to changes in labor substitution trends.
What’s Up (or Not Up) With Wages?
Many analysts note that nominal wage growth has been lower than expected since the end of the Great Recession (see, for example, Danninger 2016). In particular, nominal wage growth was below trend from the end of 2009 to the beginning of 2015 – the period covered by many studies – despite the decrease in unemployment. Many studies will show wage growth of about 3.5% during this period (see, for example, Barrow and Faberman 2015 and Dolega 2016), but according to data from the Bureau of Labor Statistics (BLS), the growth is annual. . it appears in the clock. compensation is only 2.1 percent. If we consider the entire period after the Great Recession (from 2009: Q3 to 2016: Q2), the average growth in hourly compensation was 2.2 percent.
We examine the extent to which wage growth has been in line with the “fundamentals” – productivity growth and inflation. We found that fundamentals explain much of the gap in wage growth since the Great Recession: Lower-than-expected labor productivity growth and lower-than-expected inflation. We also found that since the end of 2014 the situation has changed, and wage growth has been higher than would be consistent with labor productivity growth and inflation. It was discussed that the situation of wages is the result of the lack of employment of the workers, and the way the workers are able to create the situation of employment.
Wage growth is a function of labor productivity and inflation, both of which have been lower than expected in recent years. Real productivity growth (real output per hour) has been lower than the Congressional Budget Office’s (CBO) estimate of potential labor productivity growth since 2011 (Figure 1). Meanwhile, CPI inflation has been below the Survey of Professional Forecasters (SPF) inflation forecast since 2011 (Figure 2).
Could lower labor productivity growth and lower-than-expected inflation explain slow wage growth? To answer this question, we consider a very simple economic model where there is a competitive market with identical firms producing a single product and using labor as the only input. Firms take product and input prices as given. Based on this model, we get: 1
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The model allows us to compare inflation-adjusted wage growth and productivity growth with normalized wage growth (figure 3). To calculate the inflation rate, we use the CPI; to calculate wage and productivity growth, we use the hourly compensation and labor productivity series from the BLS Primary Sector Productivity and Cost database because they are measured consistently and are therefore comparable. Although we use CPI for inflation, our results are robust to other measures (PCE, core PCE, and core CPI, for example).
Note that real wage growth is often lower than would be consistent with inflation and productivity growth, a fact highlighted by Fleck, Glaser, and Sprague (2011) among others. Interestingly, this pattern has changed recently. Since 2014: Q4, real wage growth has been higher than expected due to inflation and output growth.
Although we can expect a short-term conflict between compensation and labor productivity, long-term disparities have been noted by economists. There are two main explanations for the gap. The first includes a gap in the fact that two different deflators are used to adjust the data for each series. The GDP deflator is used to adjust for labor productivity and the CPI is used as a measure of steady wage growth. A second explanation relates the difference between the two series to changes in the share of employee income over time. Elsby, Hobijn, and Sahin (2013) point out that the labor force participation rate remained roughly constant between the 1950s and the mid-1980s, but has continued to decline over the past 25 years. Furthermore, evidence shows that the decline has increased since 2000. According to Fleck, Glaser, and Sprague (2011), the decline in the labor force share is the main cause of the compensation-productivity gap observed from 2000 to 2009.
We examine the evidence for both explanations. First, we set the labor productivity growth series with the CPI as the deflator and recreate Figure 3 with the output series (Figure 4). Although numbers 3 and 4 are not the same, the qualitative results are the same. Therefore, although the difference in the deflator may be important, it cannot explain the difference between predicted and actual wage growth after 2006.
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Next, we examine the definition of job duties. As can be seen in Figure 5, the labor force participation rate has increased steadily since 2015: Q1, while it averaged or decreased from 2001 to 2015.
Changes in the share of workers can indicate that companies are replacing workers who perform traditional tasks by automating those tasks or firing them (Acemoglu and Autor 2011). By eliminating some of the company’s employees, the process of automation reduces the total cost of the company and, therefore, the share of the total output that goes to labor. In addition, the threat of automation further reduces workers’ bargaining power, inhibiting wage growth. Finally, the process of change often occurs in the middle of the wage distribution, which not only increases wage inequality, but also often reduces the average wage, because the number of workers affected by automation (middle class workers) is very large. more than the number of workers who can benefit (high skilled workers). A similar argument can be made for the offshoring process.
Regarding the timing of labor capital substitution in the business cycle, Jaimovich and Siu (2015) show that this process is focused on economic downturn and unemployment. This explanation is supported by Sprague’s (2014) observation that hours decreased more than output during the Great Recession. In addition, output recovered faster than hours after the Great Recession, resulting in rapid growth in output in 2009 to 2010. In contrast, the most recent period of low productivity growth (2011 onwards) where we see the effect. and associated closing hours. This pattern suggests that automation of the workforce may have begun, with current job growth concentrated in areas where automation is uneconomic (jobs that require impractical or difficult skills).
To test the evidence of changes in the process of labor substitution, we need to extend the original model to the case where capital is the productive output, and firms must choose the combination of capital and labor used in production. This integration means that we have to adjust the BLS measure of labor productivity – output per hour – by subtracting the contribution of capital to output, which we do with the BLS money labor series:
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So, we need to adjust our measure of labor productivity to capital (machinery, equipment, buildings, etc.) using data from the BLS Primary Sector Multifactor Productivity series. Unfortunately, the capital intensity time series ends in 2014. Figure 6 shows our results with the available data.
After we adjust for possible changes in the transition between incomes, observed wage growth is consistent with the baseline since 2013. In addition, the gap between underlying wage growth and real wage growth narrows significantly. Also note that the product was developed around 2010
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