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Why aren't wages rising?


IT'S a mystery. The US economy seems strong. Since the nadir of the Great Recession, employers have added about 19 million workers. The unemployment rate is 4 per cent, near the lowest level since 2000. By standard economic theory, the strong demand for labour should be pushing up wages. But that is not happening. Wage gains of 2.7 per cent roughly match inflation.

And no one really knows why.

The puzzle is not just American. It also applies to much of Europe and Japan. "Wage growth is still missing in action," declares a new report from the Organisation for Economic Cooperation and Development (OECD). Worse, the "unprecedented wage stagnation is not evenly distributed across workers". While wages of the top one per cent are growing, they are stagnating for most others. Inequality and resentment worsen.

Nor does the media agree on what is happening. Many publications have run stories exploring the wage puzzle. But others, notably The Wall Street Journal, have reported that labour markets are stronger than they seem. "Workers Welcome Wage Gains, But Companies Feel Squeeze," said one recent Journal headline. "Hiring Boom Draws Workers Back," said another.

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According to government figures, there are now 6.7 million job openings - a record high - and "the rate at which workers are quitting their jobs is higher than it was before the onset of the Great Recessions", writes economist Michael Strain of the American Enterprise Institute in a column for Bloomberg. Still, as yet, wages have not exploded. One intriguing theory asserts that psychology and norms have changed, writes Mr Strain.

"People who entered the labour market during and after the Great Recession have lived through some rough times, and don't have strong memories of better times," he writes. "I'm sure that many workers - both relatively new entrants and those with long experience - have had moments when they felt lucky to have a job at all. Even though the economy has been strengthening for years, are workers reluctant to go into the boss' office and ask for a raise? Likewise, employers are used to resisting increases in their payroll obligations."

Maybe. Mr Strain admits that this is just a guess, and finding corroborating evidence is hard. He also usefully lists other theories. With thanks and apologies to him, here is a summary of his summary.

(1) There is more "slack" in labour markets than standard employment statistics indicate. People who had given up looking for work are re-entering the job market. More than five million people say that they would like a job but are not counted in the labour market because they are not looking.

(2) Demographics - the ageing of American society - distort reported wage changes. As well-paid baby-boom workers retire, they are being replaced by younger and not-so-well-paid workers, even though their wages may be rising. But the effect is diluted by the loss of retirees' high wages.

(3) Employers are competing for workers "using levers other than wages" - better fringe benefits, signing bonuses, laxer overall standards in hiring. Although these have economic value, they do not boost wages.

(4) Some employers refrained from cutting wages during the worst of the recession and are now trying to offset these higher costs by delaying new wage increases.

(5) There is no problem - only a misinterpretation of economic data. Mr Strain cites a study by Adam Ozimek of Moody's Analytics that examined the "employment rate" (the share of a population with a job), as opposed to the unemployment rate, and found that wages are "growing at a pace you would expect". Similarly, slow productivity growth implies slow wage growth.

Mr Strain declares himself impressed but not convinced. Stay tuned to see which of these theories - or something different - is best vindicated by events. THE WASHINGTON POST WRITERS GROUP

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