The Disconnect Between Unemployment and Wages

IMF Blog, September 27, 2017

Source details

Authors: Gee Hee Hong, Zsoka Koczan, Weicheng Lian, Malhar Nabar
Publication date: September 27, 2017
Context: Findings reported in the October 2017 World Economic Outlook.
Core question: Why isn’t a higher demand for workers driving up pay despite falling unemployment rates after the Global financial crisis of 2008-2009?

Job growth picked up in many advanced economies while nominal wage growth remained subdued relative to pre-recession levels.
Headline unemployment rates have returned to pre-Great Recession ranges in many cases, yet wage growth has not recovered to comparable levels.
Hours per worker have continued to decline (extending a trend that began before the Great Recession).
Several countries have experienced higher rates of involuntary part-time employment and an increased share of temporary employment contracts.
Sluggish wage growth occurred alongside broader structural shifts such as the emergence of the gig economy and relative shrinkage of traditional sectors like manufacturing.

Labor market slack (the excess supply of labor beyond the amount firms would like to employ) is a key cyclical factor.
Headline unemployment rates may understate slack because:
- Declining hours per worker.
- Increased involuntary part-time employment (workers employed for less than 30 hours per week who report they would like to work longer).
- Increased temporary employment contracts.
Cyclical weak demand for labor reflects weak final demand for goods and services and acts as an ongoing drag on wage growth.

A widely-recognized slowdown in trend productivity growth reduces firms’ willingness to accommodate fast increases in compensation by squeezing profitability.
Ongoing automation, proxied by the falling relative price of investment goods, and diminished medium-term growth expectations appear to hold back wage growth, though analysis suggests automation may not have made a large contribution to subdued wage dynamics following the Great Recession.
Sizable common global factors behind wage weakness were especially pronounced during 2014–16, implying that labor market conditions abroad increasingly affect domestic wage setting (e.g., threat of plant relocation or increase in effective worldwide supply of labor amid closer international economic integration).

In economies where unemployment rates are still appreciably above their averages before the Great Recession (examples cited: Italy, Portugal, and Spain):
- High unemployment can explain about half of the slowdown in nominal wage growth since 2007.
- Involuntary part-time employment acts as a further drag on wages.
- Implication: Wage growth is unlikely to pick up until slack diminishes meaningfully—requiring continued accommodative policies to boost aggregate demand.
In economies where unemployment rates are below their averages before the Great Recession (examples cited: Germany, Japan, the United States, and the United Kingdom):
- Slow productivity growth can account for about two-thirds of the slowdown in nominal wage growth since 2007.
- Involuntary part-time employment still appears to weigh on wage growth, suggesting greater slack than headline unemployment rates capture.
- Implication: Accurately assessing the true degree of slack is important for determining the appropriate pace of exit from accommodative monetary policies.

For economies with remaining slack: continue accommodative policies to boost aggregate demand to reduce slack and lift wages.
To address vulnerabilities of part-time and nonstandard workers, possible measures include:
- Broadening minimum wage coverage where it does not currently include part-time workers.
- Securing parity with full-time workers by extending pro-rated annual, family, and sick leave to part-time workers.
- Strengthening secondary and tertiary education to upgrade skills over the longer term.
Accommodative policies that help lift aggregate demand would also lower involuntary part-time employment driven by cyclical weakness.

Source: The Disconnect Between Unemployment and Wages (IMF blog, September 27, 2017).

失业与工资之间的脱节; IMF博客; 2017 年9 月27 日
- 失业与工资之间的脱节; IMF博客; 2017 年9 月27 日 (Markdown version)
- 失业与工资之间的脱节; IMF博客; 2017 年9 月27 日 (PDF)
失業率と賃金の間で失われたつながり; ジー・ヒー・ホン、ゾカ・コザン、ウェイチェン・リアン、マルハー・ナバー IMFブログ, 2017年9月27日掲載
- 失業率と賃金の間で失われたつながり; ジー・ヒー・ホン、ゾカ・コザン、ウェイチェン・リアン、マルハー・ナバー IMFブログ, 2017年9月27日掲載 (Markdown version)
- 失業率と賃金の間で失われたつながり; ジー・ヒー・ホン、ゾカ・コザン、ウェイチェン・リアン、マルハー・ナバー IMFブログ, 2017年9月27日掲載 (PDF)
Ослабление связи между безработицей и заработной платой
- Ослабление связи между безработицей и заработной платой (Markdown version)
- Ослабление связи между безработицей и заработной платой (PDF)