Capitol Report: Here’s why wage growth has been so limited despite the lowest unemployment in decades
The U.S. and the U.K. have both seen an apparent paradox of a sharp decline in the unemployment rate accompanied by a paltry pay growth.
Andy Haldane, chief economist of the Bank of England, on Friday set out to explain the puzzle in a speech delivered to a “Future of Work” conference in London.
After the Great Recession, there’s been a steady stream of jobs growth on both sides of the Atlantic. In the U.S., that’s taken the unemployment rate down to 3.7%, the lowest since 1969, and in the U.K., the jobless rate is down to 4%, the lowest level since the mid-1970s.
Pay growth on both sides of the Atlantic has remained muted, however.
Adjusted for inflation, pay has fallen across every region of the U.K. since 2008, Haldane said. The U.S. picture is only slightly better.
Haldane explains a number of reasons why the so-called Phillips Curve — which stipulates that the tighter the jobs market, the greater the pressure on pay — isn’t dead but has “moved hospital.”
One big factor is the downward shift in inflation expectations.
Movements in inflation have been a key driver of pay growth historically. “They are the main reason why the Phillips curve shifted downward significantly as the Great Inflation of the 1970s gave way to the Great Moderation of the late 1990s,” he said.
Another factor has been the deterioration in productivity since the Great Recession. “We would expect weak productivity in turn to have been reflected in lower pay growth,” he pointed out.
On both sides of the Atlantic, there also has been a downward shift in how central bankers measure the non-accelerating inflation rate of unemployment, or NAIRU.
Another factor holding back wage growth has been the reticence of workers to quit for different jobs.
“The global financial crisis raised unemployment and job insecurity. With workers fearful of unemployment — and employers having less need to attract workers given the large pool of unemployed — voluntary job moves plummeted,” he said.
Only in recent years has the proportion of what the U.S. calls quitters and what Haldane calls “twisters” has picked up. Those quitters get paid more — Haldane cited U.K. data saying “twisters” are seeing 7% annual pay growth.
The Atlanta Fed’s wage growth tracker shows a 3.7% gain in the 12-month moving average ended August for job switcher versus 2.9% growth for job stayers.
“In short, job insecurity reduces workers’ pay power and weakens upward pressure on pay,” he said.
Still another factor is the degree of unionization and collecting bargaining, both of which have fallen.
“As with job insecurity, this will in turn have tended to lower workers’ pay power and increased the degree of wage differentiation within the workplace,” he said.
Another reason is the degree of automation in the workplace. He cited an IMF study that found one extra robot per thousand workers lowers wages by 0.25-0.5%. It follows that the robots are driving down U.S. wages more, as the U.S. has 170 robots per 10,000 employees compared with the U.K.’s 71. (Germany has 301 robots per 10,000 workers.)
Finally, so-called “superstar” firms that lead to industry concentration have the effect of exerting a greater degree of power over workers. “Rising concentration across different sectors of the U.S. economy has been found to have had a significantly negative effect on their labor share,” he said. Haldane said similar effects were found in the U.K. in a study by the Bank of England.
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