I found this Bloomberg View piece by Conor Sen to stimulate the old noodle re why wage growth has generally been lagging. That is, given the persistent tautness in the job market, I’d expect a bit more wage acceleration than we’ve seen.
Before I get to Sen’s points, however, a few facts to consider. One, based on still-recovering employment rates for prime-age workers, the job market is still not as tight as the unemployment rate suggests. Two, some series do show faster wage growth. The figure below show solid recent growth in the real earnings of low-wage, African-American workers (25th percentile). The data are very jumpy so I added a trend, with a trend-based forecast at the end of the series. Still, most other series are not this positive. Third, productivity growth, though it has picked up a bit in recent quarters, remains low, and that too is a constraint on wage growth.
Sen’s argument is that even employers who need new workers are avoiding raising their wage offers because they don’t want to have to raise the pay of their incumbent workforce.
When an employer in the Boston district was asked why the company didn’t raise wages as a way of attracting more workers, it responded that if it had done so, it would have had to pay all the existing workers more, which would be uneconomic. And another contact in the Boston district said that when a worker departs, the replacement typically ends up earning 10 percent more than the departing worker made.
This implies that incumbents could do much better if they left their jobs paying well below what they could get elsewhere given current conditions. That would show up as more labor-market churn, which has, in fact, been down in recent years (the economist Betsey Stevenson has long emphasized this development).
If so, then perhaps incumbent workers are just too used to a labor market market characterized by stagnating pay so they don’t bother looking for a better job elsewhere, under the assumption that, pay-wise, their next job would be no better than their current one. It’s “well-anchored expectations,” applied to a job market long characterized by wage stagnation. And just like with the Fed’s inflation problem–undershooting their inflation target for years on end–it takes a long time for expectations to change.
The problem with the theory is that while the stock of workers is much bigger than the flow, the flow is non-trivial, so I’m not sure how new workers getting jobs in firms that must pay them more in periods like now fit into this explanation. Sen implies that this hasn’t happened yet, though it’s coming:
A company can survive for a while by leaving vacancies unfilled and saddling remaining employees with the work. But eventually key positions open up that absolutely must be filled, and staffing has to be maintained to ensure an adequate level of service. When that time comes, the companies who have been most focused on keeping labor costs low, and have shown industry-leading profit margins to investors, may be in for the most pain.
It’s a bit hard to square that with the creation of millions of jobs per year, so one should still consider shaving with Occam’s Razor here: as the job market tightens further, we’ll see more wage gains both in stocks and flows (i.e., old and new workers). But Sen’s interesting observations do square with my own that US employers have just thoroughly forgotten how to raise pay, and they don’t have too much by way of unions to remind them.