In a new Economic Letter , San Francisco Fed economists Mary Daly , Bart Hobjin , and Brian Lucking take a look at wage growth. Wage growth has been strong compared to the overall rate of recovery and growth of GDP in the US. So what is to explain this growth? Daly, Hobjin, and Lucking provide one quick answer: One reason real wage growth has been so solid is that inflation has been low, with the personal consumption expenditures price index increasing at an average annual rate of 1.8% since the start of 2008. Low inflation means that employers cannot reduce real wages simply by letting inflation erode the value of worker pay. Instead, if they want to reduce real labor costs, they must cut the actual dollar value of wages. Employers generally avoid doing so because cuts to nominal wages can reduce morale and prompt resistance even in difficult economic times (Kahneman, Knetsch, and Thaler 1986). The inability or unwillingness of employers to reduce nominal pay is known as downward wage rigidity. When economic conditions are poor, this rigidity can disrupt normal labor market functioning, especially in a low-inflation environment. If wages are downwardly rigid, workers may receive false signals about the value of remaining in a particular occupation or industry. For example, consider construction workers who are less productive now than they were five years ago because of the bursting of the housing bubble. If their wages fell, they might seek jobs in other industries. Because of downward wage rigidity, they may stay in construction instead. On the labor demand side, employers that can’t cut wages may delay expanding payrolls as conditions improve. Either way, downward nominal wage rigidities can result in misallocation of resources in the economy. Read Why Has Wage Growth Stayed Strong? here .
Filed under: wages, recovery, Federal Reserveeserve Bank of San Francisco, San Francisco Fed, economic letter, pay, mary daly, personal consumption expenditures, nominal pay, bart hobjin, consumer expenditures, wage rigidity, worker pay, inflations, brian lucking, wage growth