What’s depressing wage growth? Cleveland Fed researchers look at short- and long-term factors

Slow productivity growth and labor’s declining share of income are among the factors depressing real wage growth, say Cleveland Fed researchers

Measuring from the end of the Great Recession, real compensation per hour has risen by only 0.5 percent, much less than at this point in past recoveries. While temporary factors may explain some of the slow growth in wages, Federal Reserve Bank of Cleveland researchers Filippo Occhino and Timothy Stehulak say that longer-term changes in the economy – including the slowdown of labor productivity and the decline in labor’s share of income -- have likely played a larger role in depressing real wage growth.

Productivity growth in the nonfarm business sector has averaged only 1.46 percent since 2004 and 0.85 percent since 2010. As the growth of labor productivity is a key determinant of real wage growth in the long run, the researchers say the slowdown of productivity has probably helped to depress wage growth.

Occhino and Stehulak also say that other long-term changes in the economy, including evolution of the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies, have caused labor’s share of income to decline at a faster pace since 2000 than in previous years, and in doing so, have likely held down real wage growth. Labor’s share of income has declined on average about 0.5 percent per year since 2000, after declining at an average rate of 0.1 percent per year from 1960 to 2000. In an accounting sense, the researchers say the faster decline since 2000 has subtracted about 0.4 percentage points per year from average real wage growth relative to the period before 2000.

Going forward, Occhino and Stehulak say wage growth will likely pick up in the short run, as inflation rises and labor market conditions strengthen further. In the longer run, they say that whether average real wage growth remains lower than in the past will depend on whether trend productivity growth continues to be low and whether other fundamental economic forces cause further declines in labor’s share of income.

Read Behind the Slow Pace of Wage Growth

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892