Why is real wage growth anemic? It’s not because of a skills shortage
Despite an unemployment rate at 4.1 percent or less since last October, wage growth has been anemic. In fact, over the last year, the average real wage of private sector workers saw no growth at all. While the total lack of growth in inflation-adjusted (real) wages over the last year is due in part to an increase in energy prices that is likely temporary, the slow real wage growth we’ve seen in recent years is mostly driven by nominal wages failing to rise quickly even in the face of low unemployment.
Some have posited that our far-less-than-stellar wage growth right now could be due to workers not having the skills employers need. But that idea has the logic backwards. When employers can’t find workers with the skills they need at the wages they are offering, they will raise wages in order to attract qualified workers—if employers can’t find the workers they need among the unemployed, they will offer higher wages in an attempt to poach needed workers from other firms, who will then raise wages in an attempt to keep their workers, and so on. In other words, if there are skills shortages, we should see signs of faster wage growth for workers with needed skills. This fast wage growth for skilled workers should push up average wages, not weigh them down. Since we continue to see anemic average wage growth, not just slow wage growth for select groups of workers, it’s clear that there is not a widespread shortage of the types of workers (i.e., those with the right skills) that employers need.
But we certainly hear widespread employer complaints about not being able to find workers. Why? One reason is monopsony power in the U.S. labor market. There is a lot of evidence that many firms have monopsony power, either because of a limited number of buyers of labor or other sources beyond labor market concentration. When firms have monopsony power, they are able to pay workers less than what their work is “worth,” i.e. less than their marginal product. But a key dynamic of monopsony power is that even though monopsonists would like to hire more workers, the low wages they offer mean they can’t attract more workers unless they pay more. That is, it is a normal state of affairs for a firm with monopsony power to wish they could hire more workers at the wages they are offering, but to be unable to attract additional workers because their wages are too low. So when a firm with the power to set wages below a workers’ marginal product complains about not being able to find workers at the wages they are offering, it’s useful to remember that they are choosing to keep wages low in order to increase profits—which remain high as a share of corporate sector income—and could get more workers by simply raising wages. And importantly, when firms with monopsony power complain about not being able to find workers, it is not adequate evidence of a skills shortage.
What would be good evidence of a skills shortage? The footprint of a bona fide shortage of workers with certain skills is a low number of available workers with those skills combined with unusually strong wage growth for workers with those skills. The table below shows real wage growth over the last year by occupation. Legal occupations are the only occupations that come close to potentially hinting at a shortage, with wage growth of 3.7 percent over the last year and an unemployment rate of less than 2 percent. Computer and mathematical science occupations, which require skills that are often mentioned in conversations about skills shortages, do have a relatively low unemployment rate, at 2.3 percent, but have seen abysmal wage growth, at less than 1 percent over the last year. No widespread shortage there. Even construction, where anecdotes of labor shortages have been persistent in journalistic accounts, shows no evidence of widespread shortages—real wage growth in construction actually fell over the last year.
Real wage growth and unemployment rates, by occupation, 2018
Occupation | Year-over-year real wage growth | Unemployment rate* |
---|---|---|
All | 1.4% | 3.7% |
Building & grounds cleaning & maintenance occupations | 3.8% | 5.7% |
Legal occupations | 3.7% | 1.8% |
Arts, design, entertainment, sports & media occs | 3.7% | 3.5% |
Farming, fishing and forestry occupations | 3.5% | 9.6% |
Installation, maintenance and repair occupations | 2.8% | 3.0% |
Sales and related occupations | 2.2% | 4.2% |
Office and administrative support occupations | 1.9% | 3.8% |
Management occupations | 1.6% | 1.8% |
Business and financial operations occupations | 1.3% | 2.6% |
Personal care and service occupations | 1.1% | 4.6% |
Food preparation and serving related occupations | 0.8% | 6.2% |
Computer and mathematical science occupations | 0.7% | 2.3% |
Transportation and material moving occupations | 0.6% | 5.3% |
Education, training and library occupations | 0.3% | 2.9% |
Production occupations | 0.3% | 4.3% |
Healthcare practitioner and technical occupations | 0.0% | 1.5% |
Construction and extraction occupations | -1.1% | 6.6% |
Architecture and engineering occupations | -1.2% | 2.0% |
Protective service occupations | -1.5% | 3.0% |
Healthcare support occupations | -2.2% | 3.8% |
Community and social service occupations | -2.4% | 2.3% |
Life, physical and social science occupations | -3.4% | 2.3% |
*The unemployment rate by occupation is only calculated for individuals who have previous work experience, which is why it is lower than the headline unemployment rate.
Note: The year-over-year real wage growth is growth between the average of the 12 months from July 2016-June 2017 and the average of the 12 months from July 2017-June 2018. Note that these are different data and time periods than the wage data described in the first paragraph of this post. The unemployment rate is the average of the 12 months from July 2017-June 2018.
Source: EPI analysis of Current Population Survey microdata
The story doesn’t change when looking by geographic area. We broke down the above table of 22 occupation categories by the nine Census divisions—resulting in 198 occupation/division cells (about as small of cells as CPS sample sizes allow). The scatterplot below shows the unemployment rate and wage growth of these occupation/division cells.
Real wage growth and unemployment rates, by division and occupation, 2018
Division | Occupation | Unemployment rate | Wage growth |
---|---|---|---|
East South Central | Management occupations | 1.4% | 10.4% |
West North Central | Community and social service occupations | 1.2% | 4.1% |
West South Central | Legal occupations | 1.9% | 23.3% |
East South Central | Business and financial operations occupations | 1.5% | 8.7% |
Mountain | Management occupations | 1.7% | 8.1% |
West North Central | Protective service occupations | 1.5% | 6.8% |
Mountain | Computer and mathematical science occupations | 1.7% | 6.0% |
South Atlantic | Legal occupations | 1.5% | 5.6% |
West North Central | Healthcare practitioner and technical occupations | 0.9% | 3.3% |
West North Central | Management occupations | 1.2% | 3.1% |
West North Central | Arts, design, entertainment, sports & media occs | 2.4% | 21.9% |
New England | Education, training and library occupations | 2.6% | 13.7% |
East South Central | Arts, design, entertainment, sports & media occs | 2.5% | 10.5% |
South Atlantic | Management occupations | 1.3% | 1.0% |
West South Central | Healthcare practitioner and technical occupations | 1.4% | 0.8% |
East North Central | Healthcare practitioner and technical occupations | 1.1% | 0.3% |
New England | Healthcare practitioner and technical occupations | 1.0% | -0.1% |
East North Central | Legal occupations | 1.3% | -0.3% |
Pacific | Computer and mathematical science occupations | 1.3% | -1.5% |
West North Central | Architecture and engineering occupations | 1.4% | -6.7% |
East South Central | Community and social service occupations | 1.3% | -7.3% |
Middle Atlantic | Life, physical and social science occupations | 1.4% | -13.3% |
East South Central | Life, physical and social science occupations | 0.4% | -13.6% |
Middle Atlantic | Architecture and engineering occupations | 1.9% | 4.0% |
East North Central | Management occupations | 1.9% | 3.7% |
Pacific | Legal occupations | 1.7% | 3.1% |
East South Central | Healthcare practitioner and technical occupations | 1.6% | 2.6% |
South Atlantic | Healthcare practitioner and technical occupations | 1.5% | 1.6% |
Middle Atlantic | Healthcare practitioner and technical occupations | 1.9% | 1.2% |
New England | Protective service occupations | 1.6% | 1.0% |
New England | Management occupations | 1.8% | -0.1% |
West North Central | Healthcare support occupations | 1.8% | -0.3% |
East North Central | Business and financial operations occupations | 1.7% | -0.5% |
East South Central | Legal occupations | 1.5% | -0.6% |
West North Central | Legal occupations | 1.7% | -1.7% |
South Atlantic | Architecture and engineering occupations | 1.6% | -2.0% |
East South Central | Protective service occupations | 2.0% | -2.3% |
Middle Atlantic | Legal occupations | 1.7% | -2.4% |
West South Central | Architecture and engineering occupations | 2.0% | -3.2% |
Pacific | Healthcare practitioner and technical occupations | 1.7% | -3.8% |
South Atlantic | Computer and mathematical science occupations | 1.9% | -4.0% |
New England | Life, physical and social science occupations | 1.7% | -4.7% |
New England | Architecture and engineering occupations | 1.7% | -6.5% |
Mountain | Life, physical and social science occupations | 1.6% | -6.7% |
Mountain | Healthcare practitioner and technical occupations | 1.7% | -7.2% |
Pacific | Community and social service occupations | 1.5% | -18.9% |
West North Central | Life, physical and social science occupations | 2.4% | 6.3% |
South Atlantic | Arts, design, entertainment, sports & media occs | 2.6% | 5.3% |
East South Central | Installation, maintenance and repair occupations | 2.2% | 5.1% |
West South Central | Community and social service occupations | 2.2% | 4.5% |
New England | Community and social service occupations | 2.3% | 4.2% |
West South Central | Management occupations | 2.1% | 4.2% |
New England | Farming, fishing and forestry occupations | 6.8% | 48.6% |
Middle Atlantic | Farming, fishing and forestry occupations | 10.7% | 22.9% |
South Atlantic | Farming, fishing and forestry occupations | 6.2% | 22.8% |
East North Central | Life, physical and social science occupations | 3.4% | 16.5% |
Pacific | Arts, design, entertainment, sports & media occs | 3.9% | 12.0% |
Middle Atlantic | Personal care and service occupations | 6.0% | 11.8% |
New England | Installation, maintenance and repair occupations | 3.3% | 10.4% |
East South Central | Building & grounds cleaning & maintenance occupations | 7.8% | 9.2% |
Middle Atlantic | Sales and related occupations | 4.8% | 8.7% |
Middle Atlantic | Computer and mathematical science occupations | 2.8% | 7.9% |
East North Central | Office and administrative support occupations | 3.8% | 7.5% |
Mountain | Building & grounds cleaning & maintenance occupations | 5.3% | 7.0% |
Middle Atlantic | Community and social service occupations | 3.0% | 6.9% |
East North Central | Protective service occupations | 2.9% | 6.8% |
New England | Building & grounds cleaning & maintenance occupations | 5.0% | 6.7% |
Middle Atlantic | Food preparation and serving related occupations | 6.7% | 6.7% |
West South Central | Installation, maintenance and repair occupations | 3.0% | 6.5% |
East North Central | Personal care and service occupations | 4.5% | 5.5% |
East North Central | Building & grounds cleaning & maintenance occupations | 6.9% | 5.5% |
West North Central | Sales and related occupations | 2.7% | 5.5% |
Middle Atlantic | Production occupations | 3.9% | 4.9% |
Pacific | Building & grounds cleaning & maintenance occupations | 4.9% | 4.9% |
South Atlantic | Building & grounds cleaning & maintenance occupations | 4.8% | 4.7% |
Pacific | Business and financial operations occupations | 3.0% | 4.7% |
East South Central | Food preparation and serving related occupations | 7.0% | 4.5% |
East South Central | Sales and related occupations | 4.0% | 4.5% |
South Atlantic | Installation, maintenance and repair occupations | 3.2% | 4.4% |
West North Central | Computer and mathematical science occupations | 2.7% | 4.4% |
West South Central | Sales and related occupations | 4.0% | 4.4% |
East North Central | Installation, maintenance and repair occupations | 2.8% | 4.2% |
Pacific | Farming, fishing and forestry occupations | 13.8% | 4.1% |
East North Central | Community and social service occupations | 2.3% | 3.2% |
South Atlantic | Business and financial operations occupations | 2.3% | 3.1% |
New England | Legal occupations | 3.3% | 3.8% |
Middle Atlantic | Office and administrative support occupations | 3.4% | 3.4% |
Mountain | Legal occupations | 3.3% | 3.4% |
West North Central | Construction and extraction occupations | 8.6% | 3.3% |
New England | Food preparation and serving related occupations | 5.7% | 3.2% |
East North Central | Healthcare support occupations | 3.6% | 3.1% |
Pacific | Food preparation and serving related occupations | 5.6% | 3.1% |
East North Central | Architecture and engineering occupations | 2.3% | 2.5% |
Mountain | Education, training and library occupations | 2.5% | 2.4% |
West North Central | Business and financial operations occupations | 2.4% | 2.4% |
West North Central | Education, training and library occupations | 2.6% | 2.2% |
West North Central | Office and administrative support occupations | 2.6% | 2.0% |
Middle Atlantic | Education, training and library occupations | 2.6% | 1.2% |
West North Central | Installation, maintenance and repair occupations | 2.1% | 0.6% |
South Atlantic | Life, physical and social science occupations | 2.1% | 0.6% |
Pacific | Architecture and engineering occupations | 2.1% | -0.4% |
West South Central | Education, training and library occupations | 2.6% | -0.5% |
New England | Healthcare support occupations | 2.3% | -0.8% |
Middle Atlantic | Management occupations | 2.2% | -1.3% |
Pacific | Management occupations | 2.0% | -1.4% |
Pacific | Installation, maintenance and repair occupations | 2.5% | -2.3% |
East South Central | Architecture and engineering occupations | 2.1% | -3.2% |
Mountain | Business and financial operations occupations | 2.4% | -3.7% |
West South Central | Protective service occupations | 2.5% | -5.8% |
Pacific | Life, physical and social science occupations | 2.3% | -7.2% |
Middle Atlantic | Transportation and material moving occupations | 6.1% | 2.9% |
Middle Atlantic | Installation, maintenance and repair occupations | 4.8% | 2.6% |
Pacific | Construction and extraction occupations | 6.6% | 2.6% |
East North Central | Computer and mathematical science occupations | 3.0% | 2.5% |
East North Central | Arts, design, entertainment, sports & media occs | 4.7% | 2.5% |
East South Central | Computer and mathematical science occupations | 3.9% | 2.4% |
South Atlantic | Office and administrative support occupations | 4.2% | 2.1% |
East South Central | Personal care and service occupations | 4.5% | 2.1% |
West North Central | Personal care and service occupations | 3.3% | 2.0% |
Pacific | Transportation and material moving occupations | 4.9% | 2.0% |
Mountain | Arts, design, entertainment, sports & media occs | 2.7% | 1.9% |
West North Central | Farming, fishing and forestry occupations | 5.6% | 1.8% |
West South Central | Computer and mathematical science occupations | 2.6% | 1.8% |
Mountain | Office and administrative support occupations | 3.7% | 1.7% |
South Atlantic | Production occupations | 4.9% | 1.4% |
Pacific | Office and administrative support occupations | 4.6% | 1.4% |
Middle Atlantic | Business and financial operations occupations | 3.5% | 1.4% |
South Atlantic | Personal care and service occupations | 4.4% | 1.3% |
East South Central | Office and administrative support occupations | 2.9% | 1.2% |
South Atlantic | Transportation and material moving occupations | 5.2% | 1.1% |
Mountain | Transportation and material moving occupations | 5.9% | 1.1% |
Middle Atlantic | Building & grounds cleaning & maintenance occupations | 7.6% | 1.1% |
West South Central | Construction and extraction occupations | 6.0% | 1.0% |
West South Central | Transportation and material moving occupations | 5.1% | 0.9% |
Pacific | Sales and related occupations | 4.4% | 0.7% |
New England | Production occupations | 3.6% | 0.7% |
West North Central | Production occupations | 3.7% | 0.6% |
East South Central | Transportation and material moving occupations | 5.2% | 0.5% |
Mountain | Protective service occupations | 6.1% | 0.4% |
South Atlantic | Healthcare support occupations | 4.8% | 0.4% |
South Atlantic | Sales and related occupations | 4.4% | 0.3% |
Mountain | Sales and related occupations | 3.7% | 0.3% |
Mountain | Production occupations | 4.0% | 0.3% |
New England | Business and financial operations occupations | 2.9% | 0.1% |
East South Central | Production occupations | 4.7% | 0.1% |
West North Central | Building & grounds cleaning & maintenance occupations | 4.6% | -0.2% |
East North Central | Sales and related occupations | 4.4% | -0.2% |
West South Central | Production occupations | 4.5% | -0.3% |
West South Central | Healthcare support occupations | 4.3% | -0.4% |
East North Central | Food preparation and serving related occupations | 6.3% | -0.5% |
South Atlantic | Construction and extraction occupations | 5.3% | -0.5% |
West South Central | Personal care and service occupations | 4.1% | -0.6% |
Mountain | Healthcare support occupations | 2.9% | -0.7% |
West South Central | Building & grounds cleaning & maintenance occupations | 5.1% | -0.9% |
West North Central | Food preparation and serving related occupations | 5.5% | -0.9% |
East North Central | Production occupations | 3.8% | -0.9% |
East South Central | Construction and extraction occupations | 5.5% | -1.1% |
South Atlantic | Education, training and library occupations | 2.7% | -1.2% |
East North Central | Transportation and material moving occupations | 5.7% | -1.3% |
Mountain | Food preparation and serving related occupations | 5.7% | -1.3% |
Pacific | Education, training and library occupations | 4.2% | -1.4% |
Middle Atlantic | Construction and extraction occupations | 8.5% | -1.4% |
South Atlantic | Protective service occupations | 2.9% | -1.5% |
New England | Arts, design, entertainment, sports & media occs | 3.9% | -1.6% |
Pacific | Production occupations | 5.0% | -1.6% |
New England | Office and administrative support occupations | 3.5% | -1.7% |
South Atlantic | Food preparation and serving related occupations | 6.4% | -1.7% |
Middle Atlantic | Protective service occupations | 3.3% | -2.1% |
Mountain | Installation, maintenance and repair occupations | 3.0% | -2.1% |
West South Central | Business and financial operations occupations | 2.7% | -2.2% |
West North Central | Transportation and material moving occupations | 4.2% | -2.2% |
New England | Sales and related occupations | 4.0% | -2.4% |
New England | Transportation and material moving occupations | 5.6% | -2.6% |
South Atlantic | Community and social service occupations | 2.6% | -2.7% |
West South Central | Food preparation and serving related occupations | 6.8% | -2.8% |
West South Central | Office and administrative support occupations | 3.6% | -2.9% |
East South Central | Healthcare support occupations | 4.2% | -2.9% |
East North Central | Education, training and library occupations | 3.0% | -3.2% |
East North Central | Construction and extraction occupations | 8.6% | -3.3% |
Mountain | Farming, fishing and forestry occupations | 7.3% | -3.4% |
Mountain | Architecture and engineering occupations | 2.9% | -3.6% |
East South Central | Education, training and library occupations | 2.6% | -3.7% |
Pacific | Personal care and service occupations | 4.9% | -3.7% |
East North Central | Farming, fishing and forestry occupations | 6.5% | -4.2% |
Mountain | Construction and extraction occupations | 5.0% | -4.2% |
Mountain | Community and social service occupations | 3.2% | -4.2% |
New England | Computer and mathematical science occupations | 3.4% | -4.2% |
West South Central | Arts, design, entertainment, sports & media occs | 3.1% | -4.5% |
New England | Personal care and service occupations | 4.7% | -4.5% |
East South Central | Farming, fishing and forestry occupations | 9.1% | -4.8% |
Middle Atlantic | Arts, design, entertainment, sports & media occs | 4.0% | -5.1% |
Mountain | Personal care and service occupations | 3.7% | -6.3% |
Middle Atlantic | Healthcare support occupations | 3.8% | -7.6% |
Pacific | Protective service occupations | 3.0% | -7.8% |
Pacific | Healthcare support occupations | 4.1% | -8.0% |
New England | Construction and extraction occupations | 7.1% | -10.0% |
West South Central | Farming, fishing and forestry occupations | 6.5% | -13.6% |
West South Central | Life, physical and social science occupations | 4.0% | -15.2% |
Note: Observations are occupation/division cells. Year-over-year real wage growth is growth between the average of the 12 months from July 2016-June 2017 and the average of the 12 months from July 2017-June 2018. The unemployment rate is the average of the 12 months from July 2017-June 2018.
Source: EPI analysis of Current Population Survey microdata
To pick arbitrary-but-reasonable cut-offs for potential labor shortages, we singled out (in red) occupation/division cells that had an unemployment rate of less than 2 percent and wage growth greater than 4 percent, and also singled out cells with wage growth of 3 percent or more if their unemployment rate was less than 1.5 percent, and cells with unemployment rates of up to 3 percent if their wage growth was at least 10 percent. There are only 13 cells that fit these definitions, comprising just 4.5 percent of total employment. They include: legal occupations in the West South Central and South Atlantic divisions; management occupations in the East South Central, Mountain, and West North Central divisions; business and financial operations occupations in the East South Central division; protective service occupations in the West North Central division; computer and mathematical science occupations in the Mountain division; community and social service occupations in the West North Central division; healthcare practitioner and technical occupations in the West North Central division; arts, design, entertainment, sports & media occupations in the West North Central and East South Central divisions; and education, training and library occupations in the New England division.
This smattering is what one might expect as a baseline in a system as large and dynamic as the U.S. labor market—there will always be some occupations in some places where there are not enough workers with the right skills. The key question is whether it is happening at a rate that is cause for thinking that the overall economy really is running hard into labor supply constraints.
Right now it’s the opposite situation—and that’s a genuine problem. Remember, while labor shortages may be a negative for firms, they are a clear win for workers, since they lead to wage increases. Right now there is scant legitimate evidence of anything but isolated concerns about scarce labor, but in today’s environment of unusually weak wage growth, somewhat more widespread labor shortages that put upward pressure on wages would in fact be a welcome development.
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