The Labor Market’s Next Chapter: Wages | U.S. Chamber of Commerce
Aug 31, 2017 - 9:00am

The Labor Market’s Next Chapter: Wages


Senior Vice President, Economic Policy Division, and Chief Economist

We should be hopeful. The U.S. labor market is turning the page to the last chapter of recovery from the recession ending over eight years prior. The penultimate chapter involved the steady drive toward full employment, a process about completed heading into 2018. The last chapter should feature a long-awaited acceleration in real wage growth, a process that will be well-received by many but which will have substantial knock-on effects.

Lagging real wage growth has frustrated workers and policy makers alike throughout the recovery. Real wages fell four years straight even after the recovery began in 2009, but finally started to rise in 2013, rose by 1.8 percent in 2015, but then fell back again to 1.2 percent in 2016.

In one respect, anemic wage growth has been a natural complement to the steady rate of job growth. Not that the rate of employment growth has been exceptional, but it has been curiously high given the relatively tepid rate of overall economic growth. As long as wage growth remained subdued, employers could better afford to add more workers.

So the process continued year after year until now a common refrain across the country, across all business sectors and sizes: employers can’t find enough workers with the skills and training needed. In a great many cases, what employers are saying whether they know it or not is they can’t find the workers they need at the wages the employers expect to pay. And there’s the rub. 

Eventually, once the need grows great enough employers are going to try something new. In some cases, employers will turn to adding capital as a solution. Adding capital to help workers become more productive is fundamental to economic growth, but the process takes time. Meanwhile, as employers seek out the workers they need, employers will have to resort to yet another time-honored solution: They have to pay more. They are going to have to start bidding harder for the workers they need, and that means a period of relatively rapid real wage growth across-the-board.

The last chapter of the healing of the nation’s labor markets should be the long-delayed period of relatively rapid real wage growth benefitting the vast bulk of the nation’s workforce. The growth in employment has been adequate, but this growth mostly benefited new hires. Those who are already employed have enjoyed fewer of the recovery’s benefits as politicians across the political spectrum have observed. If real wage growth accelerates as expected, the financial stress many Americans feel should steadily diminish.

On the other hand, rising real wages will also put new pressure on business profits, forcing many businesses to redouble their efforts to become more efficient and more competitive. Rising real wages will also likely trigger a modest increase in business failures as less profitable firms succumb to rising wage costs they cannot bear. While such business failures are lamentable, business failures are also a necessary part of the process of recovery and growth as resources are diverted from less to more efficient uses.

As Senate Democratic Minority Leader Chuck Schumer observed recently,

Americans from every corner of this country know that the economy isn’t working for them the way that it should.

A big part of this phenomenon has been the absence of strong real wage growth under President Obama’s policies. The opening of the last chapter in the labor market recovery, faster rising wages, should permit the economy to work much more effectively for the benefit of most American workers.

Critically important, however, is keeping the economy growing at a strong, sustainable pace to allow time for wages to grow. The good news, as former Clinton Administration economist Alan Blinder notes, is that the economy should have “sunny days” ahead, at least as long as bad luck and bad policy can be kept at bay. Indeed, sound economic policy can help ensure Blinder’s “sunny days” continue.

The answer is not to fall back on flimsy nostrums such as are commonly proposed and which Senator Schumer championed in his comments, but to focus on policies like comprehensive tax reform that can keep the economy growing so employment can remain high and wages can continue to grow.

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About the Author

About the Author

Senior Vice President, Economic Policy Division, and Chief Economist

Dr. J.D. Foster is senior vice president, Economic Policy Division, and chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.