If Economists Were Right, You Would Have a Raise by Now
Six years into the U.S. expansion, the link between falling unemployment and rising wages -- once almost as basic to economic theory as supply and demand -- seems to be coming unhinged.
The disconnect is puzzling to people like Colorado Governor John Hickenlooper. With one of the best growth rates among the 50 states, a population that’s younger and better educated than the nation’s and a jobless level that’s fallen further and faster than the national average, Colorado seems to have everything going for it.
Yet the rise in the state’s median wage since the recession ended in mid-2009 has averaged just 1.1 percent a year, based on data from the federal government’s Current Population Survey. That’s no better than the lackluster 1-percent-to-2-percent national pace. What gives?
“The whole notion that wage growth has been lagging job growth -- that’s the crux of the problem here,” Hickenlooper said in an interview. “We’re working very hard to figure out why.”
If the current trend continues, millions of working Americans could wait years to recover economically from the last recession and spend most of their adult lives in an economy in which low unemployment doesn't generate the wage growth needed to lift living standards.
Nationally, the U.S. unemployment rate dropped to 5.5 percent in February, the lowest in almost seven years, according to figures from the Labor Department. Accompanying that decline was only a 0.1 percent, or 3 cent, monthly rise in average hourly earnings.
The divergence is even more pronounced at the state level. Wages aren’t growing faster in states with lower, sometimes substantially lower, jobless rates than the nation’s. They’re also not rising nearly as fast as they did at similar points in the past. In fact, the link between state unemployment rates and wages, which weakened during the 1990s and 2000s expansions, is fraying still further this time around.
“If we think unemployment is going to continue to fall, we can’t assume, as we once could, that that’s going to bring wage growth with it,” said Matthew Notowidigdo, an economist at Northwestern University in Evanston, Illinois, who specializes in state labor markets.
The break in the bond “has got to make you wonder whether any of the traditional economic policy tools can work as well as they used to.”
The disconnect has set off a hot debate in economic circles. Former Treasury Secretary Lawrence Summers says the link is so weak the Federal Reserve can maintain record-low interest rates to underpin the economic expansion without the risk that wages and inflation start climbing. Policymakers such as James Bullard, president of the Federal Reserve Bank of St. Louis, say wages and the forces driving them are lagging indicators and the Fed should start raising rates soon.
The weaker link has left many workers unable to find the higher-paying positions they’d expected from an expanding economy with an improving labor market.
In Ohio, where the jobless rate recently has been more than half a point below the nation’s, Linda Jokkel, 45, took a temporary position in September as an administrative assistant at a manufacturing company earning about half what she’d been making at a previous job, and without benefits.
Jokkel had thought she’d be able to snag a new and better-paying job quickly after her position of more than 23 years as a secretary at Ben Venue Laboratories Inc. in suburban Cleveland was eliminated in 2013. Instead, she exhausted her unemployment benefits looking for full-time work that paid anywhere near what she’d been earning.
During her search, she said, she found reports about a strengthening labor market galling.
“I would hear, ‘Oh, the unemployment rate is so low,’ and I’m like, ‘No it isn’t because people like me disappear.’”
One of the fundamental axioms of labor economics, called the wage Phillips curve, says that, all else equal, lower unemployment leads to higher wages. To see patterns at the state level, Bloomberg News used statistics on annual unemployment rates and nominal median wages for the 50 states and the District of Columbia during the first six years of expansions in the 1980s, 1990s and 2000s and the current recovery, which is completing its sixth year. The data came from the Current Population Survey, produced by the Bureau of Labor Statistics and the Census Bureau.
Jobless levels were plotted against average annual wage-growth rates for each state in each expansion. The result: While the former could account for much of latter during the 1980s, the two variables have fallen increasingly out of sync.
Bloomberg News also calculated the average annual wage growth for states with lower-than-national unemployment and compared it with states that have the same or higher-than-national levels. The numbers were weighted to make sure that bigger states counted for more.
While the lower-unemployment group has had somewhat better wage growth than the higher group in this expansion, it didn’t come close to breaking out of the 1-percent-to-2-percent national rut in which wages have been stuck for several years.
To be sure, a few states have performed closer to the traditional pattern. Texas and North Dakota -- with annual jobless rates last year more than a percentage point and almost 3.5 percentage points below the national level respectively -- have seen median wages climb at an annual average of about 3 percent.
Yet much of that growth has been the result of the booming energy industry. With the recent sharp drop in oil prices, “wage pressures will come down,” said Pia Orrenius, a senior economist with the Federal Reserve Bank of Dallas.
Economists say substantially stronger earnings growth is needed to noticeably improve working Americans’ living standards and sustain a strong recovery.
“With the American economy running at an attractive, low inflation rate of 1 or 2 percent, you need wages growing somewhere between 3 and 4 percent to improve purchasing power,” said Gregory Hess, a former Fed staff economist who’s now president of Wabash College in Crawfordville, Indiana, reflecting a widely held view.
“Only that kind of growth will give people the sense that their futures -- and their children’s -- are getting brighter.”
Explanations for what’s causing unemployment and wages to come unhinged generally fall into one of two camps: cyclical and structural.
Mainstream analysts such as Mark Zandi, chief economist of Moody’s Analytics Inc. in New York, say the recession that began in December 2007 was so deep and damaging it left a large pool of untapped labor that’s not fully reflected in the unemployment rate. Companies can draw on this pool without having to raise pay.
Despite its size, Zandi said, the economy now is adding jobs at such a clip that this labor pool will be drained quickly and wages finally will start rising again. “There are already early signs of the wage revival and by this time next year it will be undeniable,” he said.
Analysts such as Mary Daly, the associate research director at the Federal Reserve Bank of San Francisco, trace recent slow wage growth to another aspect of the 2007-2009 recession: Employers didn’t cut the wages of workers they retained.
Now that employers have resumed hiring, they’re doing so at the same or lower pay, which is holding back wage growth, Daly and colleague Bart Hobijn wrote in a Jan. 5 San Francisco Fed paper. The implication is that as the expansion continues, wages eventually will start growing again.
Colorado Governor Hickenlooper said that in contrast with the boom in high-paying, high-tech positions that came into the state during the 1990s expansion, a substantial share of the new jobs this time are low-pay and low-skill. He traces the change to technology.
“Look at when people go the airport,” he said. “You don’t see people taking your luggage; all that stuff has been automated. In banking, you rarely use a bank teller anymore. All these innovations, which are successful, hurt wages.”
Hickenlooper said government must help persuade employers to create higher-level, higher-paying jobs and provide the training to fill these jobs.
Even with training, landing a better-compensated post in the state can be difficult, as Dolores Clark discovered. The 56-year-old Denver resident left a $16-an-hour health-care position in 2010 to look after her granddaughter while studying for a college degree in communications.
After a long job search, Clark has taken a temporary position at the state’s Department of Revenue, processing taxpayer checks for $11 an hour.
“Instead of just checking in people and answering phones, I wanted to do more,” she said. “Now I’m almost back to where I started.”
In Virginia -- which like Colorado has both an unemployment rate that’s a percentage point or more below the national level and weak wage growth -- analysts cite a shift in the age of job holders.
Much of the recent hiring has been for federal positions vacated by retiring baby boomers who were making $100,000 or more annually. They’re being replaced with millennials at starting pay, said Stephen Fuller, a George Mason University economist and director of the Fairfax, Virginia, school’s Center for Regional Analysis.
“It’s an invisible change in the mix of jobs and jobholders,” Fuller said.
Fuller said many economists and policy makers are missing these big underlying changes in the economy because they’re so focused on finding evidence that the traditional link between unemployment and wages is re-emerging.
“It’s hard to recognize what’s happening,” he said. “We’ve always taken jobs as a proxy for progress when it’s easy to show you can have lots of jobs, very low unemployment and still be going backwards on wages.”