January 19, 2015


Here's why wages aren't growing: The job market is not as tight as the unemployment rate says it is (Jared Bernstein, 1/12/15, Washington Post)

[N]ominal wage growth] has been stuck at about 2 percent since 2010. [...]

As the pace of job growth has picked up, the labor force has stabilized, and that's a good sign. But the participation rate is still low and some economists, including me, believe there are significant numbers of people who are not officially in the labor force -- they're neither working nor looking for work -- but would come back if decent jobs were available.

If that's true, then two other things should be true: 1) Part of the decline in the labor force is just slack that's not measured by the unemployment rate, and 2) putting the labor force rate in my model should improve its out-of-sample prediction of the wage data.

And that's just what you see in the green line in the figure. Adding the labor force participation rate to the same model, stopping the estimation in 2012 and predicting wage growth going forward, this version shows no acceleration and cuts right through the actual wage trend.

As Fed Chairman Janet Yellen has observed, "Some 'retirements' are not voluntary, and some of these workers may rejoin the labor force in a stronger economy . . . a significant amount of the decline in participation during the recovery is due to slack."

So, you want to know why wages aren't rising yet? It's because there's still too much slack in the job market. Yes, there are more jobs, but there are still either too many workers chasing them or waiting in the wings to do so that employers don't have to bid wages up to get the workforce they need.

So we start from the fact that wage growth is higher than inflation and then when we consider employment participation levels the question should be why both wage growth and inflation(deflation) aren't even lower.

Posted by at January 19, 2015 1:58 PM

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