Wage growth is sluggish despite low unemployment, and no one knows why

An overall decline in
productivity is partially linked to a decline in manufacturing
jobs.
Bill Pugliano / Stringer / Getty
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• Unemployment in the US has reached a record low, but
  wage growth is slow.
• Low productivity growth is the primary factor, but
  economists are puzzled as to how exactly the two are
  connected.
• Experts say raising wages for lower-end jobs could
  accelerate growth.
• This article is part of Business Insider’s ongoing
  series on Better
  Capitalism.

Ten years after the financial crisis, the US unemployment rate
has dropped from the crisis peak of 10% to a historically low
3.9% — but overall wage growth is still sluggish.

Comparing the last three years to the last similar period of
sustained low unemployment, Q1 1998 to Q1 2001, and you’ll see a
difference of “3.4 percentage point wage growth in hourly
earnings for prime-age wage and salary workers” compared to a 4.8
percentage point increase, President Barack Obama’s Council of
Economic Advisors chairman
Jason Furman wrote for Vox in August.

There’s a simple explanation for that, but it’s not a complete
one. And that’s from the chairman of the Federal Reserve himself,
Jerome Powell.

“I wouldn’t call it a mystery, but I would say that it’s a bit of
a puzzle given how tight labor markets appear to be,”
Powell told Marketplace’s Kai Ryssdal in July, referring to
the basic concept that a shortage of workers should mean an
increase in wages. Responding to Ryssdal’s followup as to why
that’s the case, he said, “It’s a good question. We don’t really
have the answer to that question.”

What is known is that it’s tied to a slower growth in
productivity. 

According to a report from McKinsey report, “The
Productivity Puzzle“:

“The downshift in productivity growth in the United States has
been remarkable. For decades, labor productivity had been growing
at an average pace of 2.1 percent year over year. Then in
2004, the rate of productivity growth began to decelerate,
falling to an average of 1.2 percent, year over year, during
the decade to 2014 (including a brief spike in 2009 and 2010
following the financial crisis). Since 2011, that rate has
declined further to 0.6 percent.”

There’s no consensus as to the cause of this, exactly, but it
likely has to do with an overall decline in American
manufacturing jobs, and being in the very early stages of an
industrial shift with increased automation.

Meanwhile, for the past few years we’ve been seeing an increase
in wages for low-end jobs, and an overall decrease in the number
of low-paying jobs; and a decrease in wages for higher-end jobs,
but an overall increase in the number of middle-end and
higher-end jobs. As Furman noted, “we have seen some narrowing of
inequality, measured as wages at the top relative to the bottom
(the 90-10 ratio), although there has been a continued widening
of inequality relative to the middle (the 90-50
ratio).”Andy Kiersz/Business Insider

How should we respond to this, then? Furman thinks that the Fed’s
low interest rates are set at the right level, and believes that
more states should
raise their minimum wage to continue growing wages for
lower-income workers. The economist David Blanchflower told
Business Insider’s Pedro Nicolaci da Costa that
wage growth has been slowed by a decline in worker bargaining
power, and that stronger unions would correct this.

All of it ties into Business Insider CEO Henry Blodget’s call for
a
fundamental shift in how American corporations see their role in
society, which will in turn lead to higher growth.

“Economists cite many factors that have contributed to the rise
of profits and decline of wages over the past few decades —
globalization, the ‘skills gap,’ the decline of unions, the loss
of ‘high-paying manufacturing jobs,'” Blodget wrote earlier this
year. 

There’s a simple response corporations can have, he wrote. “These
trends are real, but they obscure the real cause: Company owners
are choosing to maximize short-term profit by paying their
employees as little as possible. It’s time for a more balanced
approach.”