Sluggish wage growth since the Great Recession due mostly to weak labor productivity growth and lower-than-expected inflation, say Cleveland Fed researchers
Since late 2014, wage growth has actually been above what would be consistent with realized labor productivity growth and inflation, reflecting an increase in labor's share of income
Federal Reserve Bank of Cleveland researchers Roberto Pinheiro and Meifeng Yang say the increase in labor’s share of income may be due to a reversal of the trend to replace labor with capital. They find that the labor share was flat or decreasing for most of the period from 2001 to 2015, but it has increased consistently since 2015:Q1.
According to Pinheiro and Yang, wage growth is a function of labor productivity and inflation, both of which have been lower than forecasters expected in recent years. “While we would expect short-term deviations between compensation and labor productivity, the long-run gap has attracted economists’ attention,” say the researchers, who examine the evidence for two leading explanations for that gap.
The first explanation attributes the gap to the fact that two different deflators are used to adjust each data series for inflation. Pinheiro and Yang find that “while the differences in deflators may be important, they can’t explain the difference between predicted and actual wage growth after 2006.”
The second explanation attributes the difference between the two series to a change in the trend to substitute capital for labor. “The expected gain in output per hour can be traced back to an increase in capital intensity that boosted output. Once we control for changes in capital intensity, the expected wage growth is significantly reduced,” say the researchers.
“Not only has the gap between actual wage growth and the wage growth consistent with fundamentals narrowed since late 2013, it has actually reversed, with realized wage growth being above “consistent” wage growth since late 2014,” say Pinheiro and Yang. “Moreover, most of the reversal is due to a rise in the labor share in the last year and a half, with the reversal of the capital-for-labor substitution pattern observed during the previous years.”
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.
Doug Campbell, firstname.lastname@example.org, 513.455.4479