No Victory Lap Yet: U.S. Wage Growth Elusive

IMF Blog, September 20, 2016

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Unemployment rate has been below 5 percent for some time.
Job growth is steady.
Labor participation is increasing (more Americans returning to the labor market).
Despite a bump-up in 2015, wage growth so far this year—compared to the 2000s—is still disappointingly low.
Concern: consumer spending, which makes up the majority of U.S. economic output, cannot continue at the current pace unless wages grow.

Low wages are described as a vestige of the crisis; almost eight years after the height of the crisis, laid-off workers continue to re-enter the labor force.
Decomposition effect: new employees are often hired for less than the average wage rate and, when re-entering after long unemployment spells, tend to accept wages well below peers who remained employed—pulling down the average hourly wage across all workers.
The re-entry effect is substantially larger in the post-Great Recession period than before, with returnees to the labor market having to accept large wage cuts.

Wage growth for a broad segment of steadily employed workers is lower than a decade ago.
Specific findings:
- Wages of job stayers have risen 3.5 percent this year, a full percentage point lower than before the Great Recession.
- Earnings at the 50th percentile have risen by 3.2 this year compared to 4.1 percent during 2000–07.
The slowdown is observed across services and other sectors.
Contrary to a common explanation, the rise in low-paying jobs has not grown nearly fast enough to make a substantial dent in average wage growth.
Likely important factor: declining productivity of workers — "The more productive workers are, the more they earn."

Labor mobility has slowed over more than two decades; workers transition less frequently between firms or across sectors.
Measured change in job changing:
- Declined from 20 percent of job changes per year on average in the early 2000s to 12 percent in the last few years.
The decline in job move rates was widespread: young and older workers, skilled and low-skilled, women and men.
Results persist after accounting for lower job security post-2008 and changes in age and skill composition of the U.S. labor market.
Slower reallocation: reallocation rates of workers to more productive firms appear to have slowed.
Possible causes offered:
- A rise in regulations that have raised the cost of job changing and hiring.
- Technological change that makes skills less transferable.
- A rise in social distrust.
Little evidence that job searching has become easier and job matching better; reduced mobility likely weakens a traditional source of wage growth (climbing the wage ladder by changing jobs).

A resounding wage recovery is not strongly supported by the evidence; policies to raise wages by increasing productivity are paramount.
Policy recommendations for the United States:
- Increase infrastructure investment to help businesses become more productive.
- Expand partnerships between industry and higher education institutions.
- Expand vocational training.
- Expand apprenticeship programs.

Stephan Danninger — September 20, 2016