Economists have long been expecting that wages would start to rise faster as unemployment remains low. With fewer people looking for work, employers usually start to offer higher wages to retain their best workers or to attract new ones as business expands. Journalists have reported stories about companies poaching workers from their competitors with offers of higher pay.
But the numbers have not really backed this picture up. The latest data show a bit of an uptick, with inflation-adjusted hourly wages up 1.9 percent over a year ago.
That is a nice improvement from the measly 0.3 percent real wage increase recorded the previous year but hardly the kind of number that would make workers feel that their paychecks are truly expanding after all these years.
The pent-up frustration of years of slow wage growth and high unemployment since the Great Recession of 2008 will not go away quickly in any case.
To economists and especially to the Federal Reserve, the critical question is whether this incipient acceleration of wage growth could actually wake the sleeping dragon of inflation. So far, so good, but what lies around the corner?
Another very relevant piece of information is the growth of productivity. If each worker produces more per hour, companies can handle paying higher real wages because they can spread the cost over more output. Productivity growth has also been frustratingly low in the past years.
The last data show a small improvement in 2018, with labor productivity growth increasing from 1.1 percent in 2017 to 1.3 percent in 2018. These are not numbers that herald a rapid economic expansion. Back in the halcyon days of the 1950s and 1960s, productivity grew 3 percent a year.
Such sluggish productivity growth is one reason why our current expansion hardly feels like a boom. The economy’s vital signs sound fine — inflation near 2 percent, unemployment at 3.8 percent and GDP growth of 2.9 percent in 2018. But limited wage growth after years of stagnation helps explain why this is not a feel-good economy.
Not to mention that fact that a smaller fraction of the population is actually working now than back in 2007 before the whole thing went south. The labor force participation rate has fallen by more than 3 percentage points over that time, meaning that about 5 million fewer Americans are either employed or actively seeking work.
Why has productivity grown so slowly? It may seem paradoxical that, with the advent of the gig economy and the ongoing fear of automation seemingly reducing the labor used in many goods and services, productivity is not growing that rapidly. But productivity increases are mainly the result of new investment.
With the decline of many large-scale manufacturing industry and dramatic cutbacks in government-funded investment after the recession and fiscal stimulus program, investment is actually not especially high.
The 2017 tax cuts did not produce a big bump in investment either, despite the optimistic claims of the bill’s supporters and promoters. Nonresidential investment growth picked up moderately in 2018 but has not grown at the double-digit rates seen in the past.
Economists increasingly talk with concern about increasing market power of companies. Giants in tech (Apple, Amazon, Facebook and Google), telecommunications (Verizon and AT&T) and banking (JPMorgan Chase) all play an increasing role in our economy.
There is considerable dispute over whether these companies have gained their size and position due to their superior efficiency, and some economists resist the notion that competition has decreased overall.
But there is increasing evidence that these dominant companies are feeling comfortable enough in their leadership that they do not need to raise productivity rapidly to stay on top.
Lack of investment in infrastructure has also been fingered as a culprit, along with increasing inequality that distributes money lopsidedly toward the high-saving rich rather than the lower-saving poor.
Larry Summers has been an outspoken exponent of the idea that our economy is in a longer period of secular stagnation. His diagnosis, first aired in 2013, seems topical again. Summers is quoted by the New York Times’ Dave Leonhardt as advocating:
- public infrastructure spending;
- stronger safety net programs to bolster the purchasing power of poor and lower-middle-class Americans;
- stronger antitrust programs; and
- tough environmental regulations that spur a new wave of green investment.
It's an ambitious list, but it may be the kind of strong medicine that is needed to take an economy that continues to look like it has not fully recovered from the Great Recession and make it vigorous again.
In the absence of such a shot in the arm, the economy seems destined to continue muddling along. If wage increases do finally reach a critical point, the Federal Reserve may even go back to raising interest rates. But for now, it seems that we have more time to continue our slow but unspectacular expansion.
Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.