In a new Economic Letter , San Francisco Fed economists Mary Daly , Bart Hobjin , and Timothy Ni take a look at wage rigidity. In what may seem counter-intuitive, wage growth did not slow much during the Great Recession, even as unemployment climbed rapidly. And now wages are not rising much during the economic recovery and dropping unemployment. Apparently, this has happened in other recent recessions, though the extent to which wages have been slow to respond to overall economic change seems greater. Figure 1 clearly shows downward nominal wage rigidity in the distribution of wage changes among U.S. workers in 2006 and 2011. The data cover all workers and measure how their wages compared with their previous year’s wages, if they were employed. We use 2006 as an example of a typical wage change distribution and compare those numbers with the post-recession wage changes for 2011. The distribution of wage changes in 2006 and 2011 both spike at zero, suggesting that the wages of many workers did not change from year to year. In both years, the distribution is larger to the right of zero, that is, for wage increases, than to the left of zero, for wage cuts. Consistent with downward nominal rigidity, this suggests that a large fraction of wage cuts employers wanted to carry out were not actually made. Instead, those workers were swept into the zero-change group. What is more interesting in this figure is how 2006 and 2011 data differ. First, the fraction of workers whose wages were frozen jumped from 12% of the workforce in 2006 to 16% in 2011. Second, despite the severity of the Great Recession, very few workers experienced wage cuts. These numbers edged up only slightly from 2006 to 2011. Finally, and perhaps most interestingly, the percentage of workers who received wage increases dropped notably in 2011 compared with 2006. This compression of wage increases resulted in a larger spike at zero. Read The Path of Wage Growth and Unemployment here .
Filed under: recession, unemployment, wages, recovery, San Francisco Fed, economic letter, great recession, mary daly, bart hobjin, wage growth, link between wages and unemployment, Timothy Ni