The Graph of the Week this week comes from Josh Lehner of the Oregon Office of Economic Analysis (graphs I’ve made myself are not eligible for entry in the GotW contest; if they were, I’d enter the one here).
The figure shows a pretty tight fit between state wage growth and labor market slack, broadly measured (Lehner uses Andy Levin’s slack measure, one I’ve frequently used here at OTE).
Given that we already knew that slack is negatively correlated with wage growth, what’s so special about this picture? The answer is a point that I’ve often heard economist Josh Bivens make. For a long time, when asked about why wages were largely non-responsive to growth in the economic expansion, we said “weak demand!” which you can take to mean the absence of full employment.
The years went by and we kept saying that, but people got tired of hearing it, and wanted to know why, at low unemployment–the current rate of 5.3% is almost at the rate the Fed says in consistent with full employment (5.1%)–have we not seen much wage growth? And don’t, they said, give me that “weak demand” stuff. What else ya got?
Well, as the figure shows, it’s still a demand story, especially when you measure slack by accounting for not just un- but also underemployment. No one’s claiming that’s all that’s going on–there are always many moving parts to a complex phenomenon like wage growth. But this one variable explains a third of the variance and that’s a lot in this context.
The Song of the Week is Driftin‘, an early jam from one of my all-time favorite jazz pianists, Herbie Hancock, with a great, laid back tenor sax solo from Dexter Gordon. I can’t get this damn song out of my head, so maybe it will help if I put it into yours!
(True story: I recently met the great Herbie and after professing my undying love for him and his work, I showed off my knowledge of his full oeuvre by signing this tune. I even knew what key it’s in and asked him if he remembered. He said D flat, but it’s E flat! So I had to correct him and which point he slowly backed away…)