From the Federal Reserve Bank of Kansas City's Mainstreet Views, May 10:
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 Cycles
Notes: 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).
Because 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 Cycles
Notes: 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....
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