Chart of the Week: An Answer to the U.S. Wage Puzzle

IMF Blog, July 10, 2018

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Hiring is strong, but workers still aren’t seeing big raises.
Unemployment has fallen to the lowest levels in decades, yet wages in the US have grown slowly in recent years.
The Chart of the Week, based on a new study, points to two offsetting factors that have held wages down despite declining unemployment:
- Slower growth in labor productivity (amount of goods or services produced in an hour of work).
- A decline in the share of income that goes to workers.

Worker compensation (the red line) has increased "just 2 percent or so each year, on average, since the Great Recession".
This compares with "3½ percent in the eight years before".
The modest compensation growth is "barely keeping up with expected inflation" (the blue bars), even though unemployment or “slack” has diminished (the black bars).
Slower labor productivity growth is highlighted by the orange bars and is identified as a key factor restraining pay growth.
A falling labor income share is shown by the green bars and has also held down wage growth.
An earlier related study found that the bulk of the decline in the labor share came from "changes in technology that are linked to the automation of routine tasks, followed by import penetration."

How productive workers are is a key factor for employers when making compensation decisions: if workers aren’t producing as much, employers need to restrain pay growth to sustain profitability.
The negative effects of slower productivity growth and a declining labor share have overcome the positive impact of a tightening labor market (lower unemployment).

Encourage investment and innovation to address slowing productivity growth.
Facilitate the movement of capital and labor toward their most productive uses.
Foster systems for continuous retooling and upgrading of worker skills.
Invest in education and training programs, including approaches "outside traditional channels," to prepare future workers to keep up with technological progress and global competition.
- While education and training programs would "not immediately address the short-term adjustment costs for affected workers," over time they could "enhance the resilience of employment and productivity of labor."

Source: Chart of the Week: An Answer to the U.S. Wage Puzzle (IMFBlog, Yasser Abdih, July 10, 2018).