Where is the Wage Growth?
Coming out of a recession, it is natural for wage growth to slow down especially as unemployment rises. However as unemployment drops during the recovery and competition for employees picks up, it is assumed that wages will grow faster. Since 2008 we have seen only a modest uptick in wage growth despite being below historical averages of unemployment and it is fair to start wondering why.
As seen in the chart below, often during a recovery we see employment growth spike towards 4%, however, this time around we still have barely cracked the 2.5% range. There are a few secular trends that observers have pointed out that could be the cause. One is lower inflation, so far consumer prices especially once you exclude health care have remained stable compared to historical averages. Another observation is that we are seeing a large number of baby boomers retire at their peak incomes and being replaced by cheaper and younger workers keeping the averages lower. The last hypothesis is that workers are demanding better benefits and flexible schedules instead of raises. Whatever the rationale, it is still surprising and may not provide the tailwind to the economy that many had predicted was coming. It will be worth watching to see if the depths of the recession simply delayed the typical growth of wages or if this is a longer-term trend developing.