Wage growth has been modest since the end of the Great Recession, puzzling many market observers and policymakers. We examine the relationship between wage growth and nominal wage rigidities—the share of workers whose wages have not changed—and find the current pace of wage growth is not historically unusual. Our results suggest wage growth may continue on its gradual path as long as the incidence of wage rigidities remains elevated.
Although unemployment and other measures of labor underutilization have returned to their pre-crisis levels, wage growth has remained modest since the Great Recession. The modest pace of wage growth since the end of the Great Recession is at odds with its behavior during the previous recession, when wage growth rebounded more quickly and sharply. Chart 1 shows the year-over-year percentage change in average hourly earnings of production and nonsupervisory workers. By late 2005, roughly four years after the end of the 2001 recession, year-over-year wage growth had surpassed 3 percent, and it reached 4 percent shortly thereafter. In contrast, nearly nine years after the end of the Great Recession, year-over-year wage growth has still not reached 3 percent.
Chart 1: The Path of Wage Growth over the Past Two CyclesNotes: Wage growth is measured as the year-over-year percent change in average hourly earnings of production and nonsupervisory employees. Gray bars denote National Bureau of Economic Research (NBER)-defined recessions.
Sources: Bureau of Labor Statistics (Haver Analytics) and NBER (Haver Analytics).
...MUCH MOREBecause employment relationships are typically long-lasting, individual wages may respond not only to current labor market conditions but also to how much wages were able to adjust in the past.1 For example, firms that were unable to cut wages during recessions may compensate for that inability by giving smaller wage increases as the economy recovers.2 Consistent with this explanation, we document a systematic relationship between wage growth today and the incidence of nominal wage rigidities a year ago (that is, the share of workers with zero wage change last year compared with two years ago).3 Importantly, this relationship holds true even when we account for labor market slack, proxied by the unemployment rate, suggesting nominal wage rigidities may help explain aggregate wage growth above and beyond what typical indicators suggest.
To illustrate how nominal wage rigidities have behaved over the past two recessions and recoveries, Chart 2 presents the 12-month centered average of the share of individuals with zero nominal wage change in a particular year relative to the previous year. These data are taken from the Federal Reserve Bank of San Francisco’s Wage Rigidity Meter, which is constructed from Current Population Survey (CPS) data on individuals that have not changed jobs over the course of a year.4
Chart 2: The Path of Nominal Wage Rigidities Over the Past Two CyclesNotes: Nominal wage rigidities refer to the share of workers in the same job who report no year-over-year wage change. Gray bars denote National Bureau of Economic Research (NBER)-defined recessions.
Sources: Federal Reserve Bank of San Francisco and NBER (Haver Analytics).
The chart shows that following both the 2001 recession and the Great Recession, the share of workers with zero nominal wage change first increased and then gradually declined. However, the decline following the Great Recession was much more sluggish. Indeed, while nominal wage rigidities are below their post-Great Recession peak of 16.5 percent, they are still well above the peaks observed in the previous recovery—and they appear to be rising again....