It's a mystery. The U.S. economy seems strong. Since the nadir of the Great Recession, employers have added about 19 million workers. The unemployment rate is 4%, near the lowest level since 2000. By standard economic theory, the strong demand for labor should be pushing up wages. But that isn't happening. Wage gains of 2.7% roughly match inflation.
And no one really knows why. The puzzle is not just American. It also applies to much of Europe and Japan. "Wage growth is still missing in action," declares a new report from the Organization for Economic Cooperation and Development. Worse, the "unprecedented wage stagnation is not evenly distributed across workers." While wages of the top 1% are growing, they're stagnating for most others. Inequality and resentment worsen.
Economist Michael Strain of the American Enterprise Institute, explains, "People who entered the labor market during and after the Great Recession have lived through some rough times and don't have strong memories of better times," he writes. "I'm sure that many workers — both relatively new entrants and those with long experience — have had moments when they felt lucky to have a job at all. Even though the economy has been strengthening for years, are workers reluctant to go into the boss's office and ask for a raise? Likewise, are employers used to resisting increases in their payroll obligations." Strain admits that this is just a guess, and finding corroborating evidence is hard. He also usefully lists other theories. Here's a summary of his summary.
(1) There's more "slack" in labor markets than standard employment statistics indicate. People who had given up looking for work are re-entering the job market. More than 5 million people say they'd like a job but aren't counted in the labor market because they're not looking.
(2) Demographics — the aging of American society — distort reported wage changes. As well-paid baby-boom workers retire, they're being replaced by younger and not-so-well paid workers, even though their wages may be rising. But the effect is diluted by the loss of retirees' high wages.
(3) Employers are competing for workers "using levers other than wages" — better fringe benefits, signing bonuses, laxer overall standards in hiring. Although these have economic value, they don't boost wages.
(4) Some employers refrained from cutting wages during the worst of the recession and are now trying to offset these higher costs by delaying new wage increases.
(5) There is no problem — only a misinterpretation of economic data. Strain cites a study by Adam Ozimek of Moody's Analytics that examined the "employment rate" (the share of a population with a job), as opposed to the unemployment rate, and found that wages are "growing at a pace you would expect." Similarly, slow productivity growth implies slow wage growth.
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