Wages Lag in Otherwise Healthy Economy

It’s safe to say that the U.S. economy is strong. Measures of business optimism, tracked by the National Federation of Independent Business, have hit all-time highs. Business investment as a percent of gross domestic product is almost as high as it has been since the recession. Broad measures of unemployment are as low as at the peak of the mid-2000s boom. And, job creation continues at a healthy clip.

But one important economic indicator remains subdued—wages.

In terms of real wage growth, 2017 wasn’t a great year, and for non-supervisory workers, it was especially slow.

The biggest wage gains since the recession came in 2015, thanks to a fall in oil prices that held inflation down while dollar wages rose. Now, inflation is back to a more normal level, but dollar wages aren’t rising much faster, meaning that workers are pocketing fewer gains.

Median real weekly earnings for American workers actually fell in late 2017 after hitting a plateau earlier in the year.

Why are low unemployment, robust business investment and soaring confidence measures not causing faster real wage growth?

Analysts point to a few possibilities.

First, employers may be gaining power. A rising concentration in labor markets
—a decrease in the number of employers competing for workers—has led to the suppression of wages, researchers suggest. When there are only a few employers, the supply-and-demand model breaks down, and powerful companies start holding wages below what a competitive market would provide.

Next, low unemployment may be making workers less productive. When layoffs loom, employees tend to work harder in order to keep their jobs, but when the economy reaches full employment, the pressure comes off. Labor productivity isn’t perfectly correlated with wages, but it does have some effect.

A third possible reason is simply caution after the long, deep recession.

Source: Industry Week