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07.10.20

Fed research does not find hidden labor market slack restraining wage growth

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Despite substantial and ongoing improvement in labor market conditions during the recent expansion, wage growth appeared to be modest relative to the degree of labor market tightening. This observation led to concerns about workers’ ability to realize meaningful real wage growth even when labor markets are relatively strong, as well as questions about a weakened relationship between wage growth and the unemployment rate.

This Economic Commentary takes a close look at the aggregation methods used to construct wage measures and that demonstrates that average hourly earnings (AHE) growth reflects disproportionately the profile of high-earning workers who typically display lower and less cyclically sensitive wage growth. Using data from the Current Population Survey (CPS), researchers Michael Morris, formerly of the Dallas Fed, Robert Rich of the Cleveland Fed, and Joseph Tracy of the Dallas Fed adopt a different aggregation method and compute wage growth as the average of individuals’ wage growth.

“The analysis indicates that the CPS measure of average wage growth is significantly higher than AHE growth and that it displays a more meaningful nonlinear relationship with the Congressional Budget Office’s unemployment gap,” say the researchers. “Our findings do not support the claim that there was hidden labor market slack restraining wage growth during the recent expansion.”

Read more: How Aggregation Matters for Measured 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. For more information, go to www.clevelandfed.org or follow us on Facebook, Twitter or LinkedIn.

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