Fed research does not find hidden labor market slack restraining wage growth
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.”
Federal Reserve Bank of Cleveland
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