As if watching your paycheck stagnate for the last couple years hasn't been bad enough, Federal Reserve researchers are out with more (potentially) bad news: Unless we get some big shifts in global economic forces, your wages could be weak for a while.
Longer-term changes including soft productivity growth and labor's declining share of income are at the heart of the problem, Filippo Occhino and Timothy Stehulak at the Cleveland Fed find. These two macroeconomic shifts, which result from broad themes such as globalization and technology, are felt all the way down to the U.S. worker.
Productivity is important because it fosters faster economic growth without generating higher inflation. Companies can pay their workers more while still seeing their earnings increase.
Labor productivity — measured as the amount of goods or services produced by an employee in one hour — has averaged 1.5 percent growth in the 10 years ended 2014. That compares with 3.6 percent from the second quarter of 1997 to the end of 2003 — the salad days of American productivity.
Gains in productivity have been slow to come by as companies hold off on investing in new capital equipment. Some economists such as Robert Gordon have argued that the U.S. is doomed to stagnant growth, with the low-hanging fruit of big technological innovations, such as the steam engine, all picked.
Another factor keeping wage growth depressed is labor's declining share of income, the Fed authors note. While it's been on the downtrend for years, "the evolution of the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies" have exacerbated it since 2000, likely holding down wage growth, they wrote. The faster decrease since then has shaved 0.4 percentage point each year from average real wage growth, compared to the period before 2000.
This mirrors the sentiment Fed Chair Janet Yellen expressed in March 27 remarks at a monetary policy conference in San Francisco:
The outlook for wages is highly uncertain even if price inflation does move back to 2 percent and labor market conditions continue to improve as projected. For example, we cannot be sure about the future pace of productivity growth; nor can we be sure about other factors, such as global competition, the nature of technological change, and trends in unionization, that may also influence the pace of real wage growth over time. These factors, which are outside of the Federal Reserve's control, likely explain why real wages have failed to keep pace with productivity growth for at least the past 15 years.
Yellen touches on some temporary factors that are at play. Those include low inflation overall as well as pent-up wage deflation — the idea that companies didn't lower wages enough during the recession, so they've made up for it by not doling out raises as much during the recovery.
While a strengthening U.S. labor market may help wage growth surmount those hurdles, a return to rates of the past will depend on trends in productivity and broader shifts in the global economy that may be harder to overcome.
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