Unemployment is at a 40-year low — why aren’t wages rising more?

There's some slack in the labor market -- and a lack of worker bargaining power

Washington’s unemployment rate, like the nation’s, continues to improve, hitting a historic low this month — but wage growth for most workers is still lagging. Why isn’t a more competitive job market helping boost workers’ ?

In the past, reaching 4 percent unemployment pushed hourly earnings for non-managers up by an average 4.3 percent over the year prior. But as of February 2019, those earnings had increased just 3.3 percent. A 1.1 percentage point gap may not sound like much, but it’s equivalent $680 million that Washington workers did not earn in the last quarter of 2019 alone.

Tableau

To understand why wages aren’t rising, let’s peer under the hood of the official unemployment rate. It counts people who don’t have jobs and have actively looked for work in the past month. In some ways, that is a sensible approach. There are people whom you wouldn’t want to count as unemployed even though they aren’t working – such as full-time students, a parent who wants to stay at home, etc.

But the drawback is that it excludes many people who might actually like a job (or would take one if it came along) but who haven’t been looking. During the Great Recession, many would-be job seekers became disparaged and stopped their searches — students who found it difficult to get interviews, middle-age workers who were laid off couldn’t get another gig, and older workers who retired early.

The official unemployment rate doesn’t count them as unemployed, so it’s not a very good way to measure how much “slack” is in the labor market – that is, potential workers who are at home instead of on the job. Less slack means a tighter labor market, and all else equal that means more upward pressure on wages. More slack in the labor market creates the opposite result.

So how can we measure of slack? One approach is to use the working-age employment rate. Put simply, this figure tells you what percentage of people age 25 to 54 (i.e., the people you’d think are most likely to be working) actually have a job.

Since the late 1980’s, employment that group has peaked at 82 percent prior to every recession. But as of 2019 (the latest data available), just 80.5 percent of prime-age workers are employed. We’re missing 1.5 percent of our prime-age workforce. And with 2.9 million people in that demographic, that’s roughly 43,500 people who you’d expect to have jobs who are instead on the sidelines.

That makes the labor market less competitive than it would seem based on the unemployment rate alone.

Tableau

The working age employment rate isn’t the only way to understand why wages aren’t rising as much as we’d expect. The underemployment rate is also an illuminating statistic.

The underemployment rate (U-6) includes everyone in the traditional unemployment rate, plus:

  • Discouraged workers (those who have stopped looking for work due to current economic conditions);
  • Marginally attached workers (those who would like and are able to work, but have not looked for work recently); and
  • Involuntary part-time workers (persons employed less than 35 hours/week but who want, and are available for, full-time work).

Take a look at how Washington measures up. The Great Recession cut deeply in the bone of the state’s labor market – and today, underemployment is still 3.4 percentage points higher than unemployment.

Tableau

Another factor accounting for sluggish wage growth is the lack of worker bargaining power. Nationwide, just 10.5 percent workers were union members in 2018, down from a post-WWII high of 33 percent.

A 2018 study by economists at Princeton and Columbia found that since the 1930s, unionized workers have made about 15-20% more than similarly educated workers. Unions are able gain this extra compensation by exerting collective power for workers who individually have little bargaining power.

But as shown below, as union membership has declined, an increasing share of the nation’s income has gone to the top 10 percent.

Tableau

Collectively, these factors tell us one thing: there are still a lot of Washington residents who could use a job – and likely, better pay for it — but they don’t have the leverage to ask for and receive it. That goes a long way to explain why wage growth hasn’t taken off, even as unemployment has hit a 40-year low.

Note: Graphs in this post may be updated after publication to reflect current data.

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