For years economists and others have wondered when wages would start to rise. Economic theory and past labor experience predicts that when unemployment becomes low, pay goes up. The rise in pay is a result of employers being forced pay more in order to attract the reduced amount of workers that are available.

As many have heard in the media and elsewhere, wage growth had not occurred even as unemployment became historically low and has remained low for some time. On May 3, 2019, U.S. unemployment fell to just 3.6%., and 263,000 new jobs were added. The lowest unemployment since the 1960’s.  Generally, unemployment under 5% is considered low. The national unemployment rate has been less than 4% for years now. Pursuant to economic theory, this low unemployment should have resulted in the start of wage growth a while ago.

On Friday, May 3, 2019, the April Department of Labor wage report was also released and reported the ninth straight month where wage growth was above 3% year over year. So, though it has taken longer to start up, wage inflation is now occurring.

But the question remains, why did it take so long?

The answer is multi-faceted.

As stated above, first it generally takes high employment. Wage inflation, like other goods and service inflation is (or should be) dictated by supply and demand. Less workers available to employ and more jobs open than qualified workers available equals higher “prices” for labor. 

The New York Times (NYT) last week reported that wage increases are being pushed up at the low end of the wage scale. Low paid workers are seeing faster increases in their wages than other higher paid workers. The force credited with moving low paid worker wages is none other than the state and local minimum wage increase movement sweeping the country. The NYT article cites research out of the Economic Policy Institute (a progressive think tank) that found low wage workers’ pay rose 13% in those states that had raised their minimum wage in the last five years. Michigan just did this late last year moving our state’s minimum wage to $9.45. Rising minimum wage requirements gets only part of the credit though. The NYT also reported that Evercore ISI research shows that rising minimum wage rates account for just a third of worker gains. Evercore posits that most of the rising wages are due to a tightening labor market.

One other dynamic at work is that the higher paying industries are taking the lower paid workers and the lower paying industries (such as retail and hospitality) then have to pay more in order to compete.

Other factors at work believed to have kept wages low for so many years has been globalization and automation. Jobs were disappearing to other lower paying countries, and robots were taking more jobs at home, thus keeping the demand for workers lower.

One other more conspiratorial but simpler theory is unemployment was underreported. That the official unemployment rate was erroneously reporting less workers available than in reality. This could be true given the “official” unemployment rate (the one used by media and politicians and the one reported above) only reports those workers that are actively looking for work. It does not include students, stay at home parents, or those persons that do not work for any reason.  By accessing the pool of perennially unemployed, which some sources say is up to 70%, the labor market has been able to continue hiring at lower rates of pay.

One economist, Adam Ozimek looks at a broader definition of unemployment. His definition of unemployment is “lacking a job for any reason, while in one’s prime working years.” He posits that based on the definition of unemployment, wage growth has been generally in line with “historical expectations throughout the [economic] recovery.”

Additional ASE Resources
Compensation Surveys –  Find out if Michigan's wages are rising with the 2019 ASE Compensation Survey results.  ASE’s compensation survey data is benchmarked and specific to Michigan.  We offer the most comprehensive data in Michigan.  The 2019 survey data will be released in May.  For more information contact Jason Rowe.

Compensation & Benefits Conference – Be the first to hear compensation trends in Michigan at the 2019 Compensation & Benefits conference.  The morning plenary  will  provide highlights from the 2019  ASE Compensation Surveys.  Register here.  

Source: New York Times, Why Wages are Finally Rising 10 years After the Recession by Ben Casselman 5/2/2019., U.S. Department of Labor Report 5/2/2019.