We Shouldn’t Accept the Unacceptable on Wage Growth

Hidden amid all the discussion of when falling unemployment will lead to rising wages are the expectations shared in the media and among economic analysts that we can only expect wages to rise when unemployment is low. There is confusion here. Yes, we certainly expect wages to rise more quickly as unemployment falls. But why is there a widespread acceptance that real wages will not rise (i.e., that wages will not rise faster than inflation) at all when there is 5.5 or 6.5 percent unemployment? Why not expect real wages to rise every year as they used to in the United States and in other advanced nations? After all, output per hour has been steadily rising, profits have been historically high, and the stock market has soared. There are certainly no economic fundamentals that only allow real wages (on average or at the median) to rise during the few short years of each business cycle when unemployment is relatively low.

These lowered expectations reflect how poorly wages have performed over the last four decades. These low expectations constitute an unstated acceptance of an unacceptable normal that real wages will rarely rise. Reflecting this, analysts claim to be “puzzled” that wages have yet to accelerate as the recovery gains momentum, but seemingly are not puzzled at all when real wages fail to grow on a regular basis. So, I am calling on analysts and the journalists who cover them to examine, or at least explain, their unstated assumptions about wage growth. My view is that the failure of white-collar and blue-collar real wages to rise for well over a decade (through the last recovery and not only the recent recession but also this recovery) reflects a policy regime that makes employers dominant in the labor market, enabling them to suppress wage growth.