Sick of Slow Wage Growth? Here's Who to Blame

Among the culprits: China, robots and baby boomers.

Megan McArdle.

"The U.S. unemployment rate is 4.3 percent. That’s not just good; it’s fantastic. The last time unemployment was that low, “Stutter” was topping the Billboard charts, George W. Bush had just been sworn in as president, and Osama Bin Laden was a name known only to a few national security wonks.

Everywhere you look, you see signs of a tight labor market. Employers are complaining that they can’t find the workers they need, and when you look at the Job Openings and Labor Turnover Survey (aka Jolts), you see that openings are up, while unemployment claims have fallen. Americans are less likely to be laid off than they have been in decades.

There’s just one place that the good news doesn’t seem to show up: wages, where growth remains, as the Washington Post recently remarked, “somewhat tepid.” If employers are having such a hard time finding workers, why don’t they do the sensible thing and offer more money? This, says Kevin Drum, is “the mystery of the tight labor market.”

It’s no fun reading a mystery without a solution, and as it happens, I have a few here in my pocket. Look at other recent trends in the labor markets: Both the supply curves and the demand curves for labor have been undergoing substantial transformations that may simply have shifted the economy to a new equilibrium. Which is an economic jargonish way of saying this may be the new normal.
Among those trends:

• Baby boomers are retiring. Most people’s earnings peak relatively late in their careers. So if you have a big bulge of older workers retiring, as we do, the younger workers who replace them are going to earn less than the retiring workers did. As my Bloomberg View colleague Conor Sen noted, this puts some downward pressure on wage growth.
  
• Productivity growth is also lagging. There are plenty of theories on why, and even more proposals to reverse that slowdown. Hourly output growth has been soft since the end of the Great Recession when compared to the recovery from earlier recessions. And while wages can temporarily outstrip productivity growth, in the long run, employers can’t keep raising wages unless those increased wages are matched by higher production, because it soon becomes unprofitable to keep employing those workers.
  
• The unemployment rate isn’t a perfect proxy for slack in the labor market. The unemployment rate reflects the number of people who are actively looking for a job and haven’t found one. But of course, there are also working-age people who aren’t actively looking for a job -- those who have left the workforce to parent, those who are sick, folks with trust funds who’ve realized that they’d really rather spend their time on the beach. The more comprehensive figure that factors in working-age people who are not working is called the Employment to Population Ratio, and it doesn’t look nearly as healthy as the unemployment rate. It peaked during the dot-com boom, fell off a bit -- and then plummeted during the Great Recession. While it’s recovered somewhat, it still stands around where it did in 1985, when women faced high barriers to having a career.
  
  There are a number of theories for why this is. People have better alternatives to working, for one thing -- leisure has become more entertaining, and the Social Security disability program seems to have become, for some people, a longer-term substitute for unemployment insurance. These payments may mean that people who in earlier eras might have kept working by moving or retraining (or working while injured) now stay out of the labor force. The program also forms a barrier to re-entering the job market, because it’s very difficult to get back on disability if you start to work and then can't continue.
  
  Nonetheless, many of the people who are out of the labor force do represent Marx’s “reserve army of the unemployed”: They can be wooed back in with sufficiently high wages. And the fact that they’re out there, and could work, may be depressing wages, because as soon as wages pick up a bit, more workers show up to compete for those jobs.
  
• A lot of sectors don’t have room to raise wages. There’s a common pattern in internet commentary: Some article is published, full of manufacturers complaining that they can’t find workers for good old-fashioned jobs, and the left half of the commentariat lowers their spectacles, looks down the bridge of their nose, and inquires “I say, old chap, did you try offering them more money?” The problem is that in many cases these employers can’t offer more money, because at current wages they are just barely competitive with China (or some other country).
  
• American workers are more productive than workers in those countries, for a variety of reasons. That lets employers pay them higher wages while still staying competitive. But often they are just barely so. To raise wages higher would require greater productivity (see above).
  
  The globalized labor market doesn’t explain everything about sluggish wage growth in the U.S., of course. Hairdressers and retail clerks do not have their wages set by brutal foreign competition. But if wage growth is soft in one sector, it may moderate others, because those employers don’t have to raise pay so much to keep their workers from seeking jobs in other industries.
  
• Every year, more and more employers have the choice of hiring people, or buying a machine or a software package to do their old job. Competition restrains the price of everything, whether it’s widgets or people-hours.

Note one thing I didn’t mention: unions. There are two reasons for that. First, the decline of private sector unions was an old story by 2007; it can’t explain what’s been happening since then.

(Unionization peaked at 35 percent in the 1950s.) And second, a lot of the discussion about unions and wages muddles up cause and effect: Losing union protection may reduce worker bargaining power, but losing bargaining power, because of competition from trade or automation, also weakens the benefits to joining a union.

Ultimately, unions are not magic. They cannot conjure economic value for workers. If they manage to keep wages higher than the market will bear over a long period of time, that tends to end as the Big Three automakers did: with mass layoffs and younger workers taking big compensation cuts.
So this slow wage growth may simply be what the labor market now looks like. Earlier eras of tight labor markets produced big increases in wages, but those increases were matched by rising worker productivity. Today, employers striving for productivity may replace the worker altogether, either by outsourcing to a lower-wage country or by giving that job to a machine.

So the biggest mystery is not why U.S. wage growth seems stuck even as unemployment falls. The biggest mystery is how we’re going to adjust our economy, our culture and our politics to the new normal."