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News from EPI EPI launches macroeconomic newsletter—to make Fed policy more transparent

Macroeconomic policy decisions, like those made every six weeks by the Federal Reserve, are crucial for people’s economic security—but these decisions are often poorly understood. To shed light on what these decisions mean in everyday life, EPI is launching a macroeconomic policy newsletter, to come out before each Federal Reserve Open Market Committee meeting. EPI experts will look at data and trends in the macroeconomy and provide evidence-based analysis of how macroeconomic developments and policies will affect the ability of working people to get jobs and raises.

Read an excerpt from our newest macroeconomic newsletter by EPI Research Director Josh Bivens, and then sign up.

Predicting wage growth with measures of labor market slack: It’s complicated

Why have wages grown so slowly in recent years despite relatively low unemployment rates? This puzzle has dominated economic commentary.

Figure A below, for example, shows a scatterplot of quarterly nominal wage growth (measured against the same quarter in the previous year) and unemployment rates since 2008. The trendline showing the relationship between these variables demonstrates it’s very weak—both statistically and economically insignificant.

Figure A

Unemployment does not predict wage growth after 2007 : Unemployment rate and annual change in nominal wage growth, 2008–2018

2008-Q1 5.00% 3.81%
2008-Q2 5.33% 3.65%
2008-Q3 6.00% 3.73%
2008-Q4 6.87% 3.88%
2009-Q1 8.27% 3.61%
2009-Q2 9.30% 3.10%
2009-Q3 9.63% 2.72%
2009-Q4 9.93% 2.62%
2010-Q1 9.83% 2.49%
2010-Q2 9.63% 2.50%
2010-Q3 9.47% 2.32%
2010-Q4 9.50% 2.20%
2011-Q1 9.03% 2.15%
2011-Q2 9.07% 2.09%
2011-Q3 9.00% 2.08%
2011-Q4 8.63% 1.82%
2012-Q1 8.27% 1.52%
2012-Q2 8.20% 1.55%
2012-Q3 8.03% 1.42%
2012-Q4 7.80% 1.45%
2013-Q1 7.73% 1.92%
2013-Q2 7.53% 1.90%
2013-Q3 7.23% 2.13%
2013-Q4 6.93% 2.32%
2014-Q1 6.67% 2.35%
2014-Q2 6.20% 2.39%
2014-Q3 6.07% 2.36%
2014-Q4 5.70% 2.13%
2015-Q1 5.53% 1.89%
2015-Q2 5.43% 2.06%
2015-Q3 5.10% 2.03%
2015-Q4 5.03% 2.33%
2016-Q1 4.93% 2.45%
2016-Q2 4.90% 2.45%
2016-Q3 4.90% 2.53%
2016-Q4 4.77% 2.42%
2017-Q1 4.60% 2.33%
2017-Q2 4.37% 2.30%
2017-Q3 4.30% 2.38%
2017-Q4 4.13% 2.33%
2018-Q1 4.07% 2.50%
2018-Q2 3.90% 2.71%
2018-Q3 3.80% 2.83%
2018-Q4 3.80% 3.25%
ChartData Download data

The data below can be saved or copied directly into Excel.

Note: Data are quarterly, with nominal wage changes measured from the same quarter in the previous year.

Source: Unemployment rates are from the Bureau of Labor Statistics (BLS) Current Population Survey and wages are the average hourly earnings of production and nonsupervisory workers from the BLS Current Employment Statistics.

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In this newsletter, I address a number of questions raised by this weak relationship between unemployment rates and wage growth since 2008. My key conclusions are:

  • Since 2008, the share of adults between the ages of 25 and 54 who are employed (or the “prime-age EPOP”) has predicted wage growth better than the unemployment rate.
  • But even the prime-age EPOP has done a poor job at predicting wage growth since 2008 compared with both its own predictive power pre-2008 and the predictive power of the unemployment rate in earlier periods.
  • The prime-age EPOP’s advantage in predicting wage growth seems to have started even a bit before the Great Recession, around 2001.
  • Because both the unemployment rate and the prime-age EPOP have seen a large reduction in their predictive power regarding wage growth since 2008, efforts to explain this decline in predictive power should involve looking to the unique features of the Great Recession: very high rates of unemployment combined with very low rates of inflation.
  • While both the unemployment rate and the prime-age EPOP are likely to be fine statistical predictors of wage growth moving forward, there has been a steady decline in how responsive wage growth is to a given change in either. In short, workers have seemingly needed ever-tighter labor markets (measured by quantity-side variables like the unemployment rate and the prime-age EPOP) to generate a given amount of wage growth.

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