For years it was the central question in an otherwise impressive recovery by the American job market: Why aren’t wages rising faster?
Unemployment was low. Hiring was strong. Corporate executives were complaining that they could not find people to fill all of the available jobs. Yet workers’ paychecks were growing only sluggishly, barely outpacing inflation.
And then wage growth suddenly picked up.
Average hourly earnings in April were 3.2 percent higher than a year earlier, the ninth straight month in which growth topped 3 percent, the Labor Department reported Friday.
Other measures diverge on the exact timing and rate of increase, but not on the basic trend: Wage growth, long stuck in neutral, has at last found a higher gear.
“We’ve spent several years going, ‘Where is the wage growth? Where is the wage growth?’” said Martha Gimbel, an economist for the job-search site Indeed. “And it turns out we just had to wait a few years for the labor market to get tighter.”
Which workers are benefiting?
The recent gains are going to those who need it most. Over the past year, low-wage workers have experienced the fastest pay increases, a shift from earlier in the recovery, when wage growth was concentrated at the top.
The faster growth at the bottom is probably being fueled in part by recent minimum-wage increases in cities and states across the country. Research from the Economic Policy Institute, a liberal-leaning think tank, found that over the past five years, wages for low-wage workers rose 13 percent in states that raised their minimum wages, compared with 8.4 percent in states that did not.
But minimum wages are only part of the story. Ernie Tedeschi, an economist at Evercore ISI, estimates that the minimum-wage increases account for a quarter to a third of low-wage workers’ gains over the past three years. The rest is most likely a result of a tightening labor market that is forcing employers to raise pay even for workers at the bottom of the earnings ladder.
Ms. Gimbel noted that better-paying industries had experienced faster job growth in recent months, while the fastest wage growth had been in lower-paying industries. That could indicate that sectors like health care and manufacturing are snapping up workers, forcing retailers and restaurants to raise pay to compete.
Still, not everyone is benefiting equally. African-American workers have seen smaller gains over the course of the recovery, for example. And wage growth remains slow in some parts of the country that were hit especially hard by the recession.
[One challenge has been to provide better-paid jobs to workers without a bachelor’s degree. Here’s a look at where to find them.]
What took so long?
Many economists were puzzled by the slow pace of pay increases because it looked as if a fundamental relationship had broken down.
Decades ago, economists observed that when unemployment falls, wages tend to rise, as companies are forced to offer higher pay to attract workers. Yet even as the unemployment rate fell from 10 percent in 2009 to less than 5 percent in 2016, wages rose slowly. Even now, with the unemployment rate near multidecade lows, wages are not rising as quickly as standard models suggest they should be.
Economists proposed all sorts of theories to explain the mystery: Globalization and automation meant that Americans were competing against lower-paid workers overseas and against robots at home. The rising power of the biggest corporations, paired with falling rates of unionization, made it harder for workers to negotiate for higher pay. Sluggish productivity growth meant that companies couldn’t raise pay without eating into profits.
The recent uptick in wage growth suggests a simpler explanation: Perhaps the job market wasn’t as good as the unemployment rate made it look.
The government’s official definition of unemployment is relatively narrow. It counts only people actively looking for work, which means it leaves out many students, stay-at-home parents or others who might like jobs if they were available. If employers have been tapping into that broader pool of potential labor, it could help explain why they haven’t been forced to raise wages faster.
It appears as if that is exactly what is happening. In recent months, more than 70 percent of people getting jobs had not been counted as unemployed the previous month. That is well above historical levels, and a sign that the strong labor market is drawing people off the sidelines.
“You look at those people who do not want a job, people who were out of the labor market due to disability, all of those people are coming back in,” said Adam Ozimek, an economist who has studied the issue.
Several years ago, Mr. Ozimek discovered that with a broader definition of unemployment — lacking a job, for any reason, while in one’s prime working years — wage growth had been in line with historical expectations throughout the recovery. That relationship has held up as the job market has improved. In other words, he argued, the wage-growth “mystery” wasn’t a mystery at all.
How high can wage growth go?
Three percent is hardly a breakneck pace for wage growth. In the tight labor market of the late 1990s and early 2000s, wage growth for nonsupervisory workers topped 4 percent for several years without causing runaway inflation.
Mr. Ozimek sees no reason that history can’t repeat. Hiring remains strong, suggesting that companies are still able to find the workers they need, even if they have to work a bit harder to get them. Inflation is not just tame; it is actually slowing, meaning Federal Reserve policymakers are unlikely to see faster wage growth as a reason to raise interest rates, at least in the short term.
But some economists still see evidence that the economy has shifted in ways that make it harder for workers to win raises. Elise Gould, an economist at the Economic Policy Institute, said that it took an unusually tight labor market to deliver stronger wage growth, and that even now there has been no significant increase in the share of corporate earnings going to workers.
“Why does the unemployment rate have to be at or below 4 percent before you see stronger wage growth?” Ms. Gould asked. “Why do employers have all the leverage? Why do they have all the power? It’s because the labor market dynamics have changed.”
There are signs that wage growth has leveled off recently. The employment cost index, a more sophisticated wage measure that accounts for changes among the industries that are hiring, rose a bit more slowly in early 2019 than it did in late 2018, the Bureau of Labor Statistics reported this week.
The most potent threat to wage growth, however, may be an end to the decade-old economic expansion. The 2008-9 recession cut short the last recovery just as wages were beginning to pick up. And while most economists see little risk of a recession today, even a modest slowdown could make companies cautious about handing out raises, said Julia Pollak, an economist for the job site ZipRecruiter.
“You need two things” for wage growth, Ms. Pollak said. “You need labor-market tightness and also employer optimism about demand.” If that optimism fades, she said, wage growth could go with it.