Policy actions that would revitalize wage growth

A Ford worker inspects paint work on the body of a Ford Expedition SUV at Ford's Kentucky Truck Plant in Louisville, Kentucky.
Editor's note:

This article originally appeared in Real Clear Markets on April 17, 2018.

The U.S. economy has experienced 90 consecutive months of employment gains. The unemployment rate is also at an 18 year low of 4.1 percent. However, U.S. wage growth has been disappointing both in recent years and over the last several decades.

Despite the uninterrupted run of employment growth, wage gains for production and non-supervisory workers over the twelve months ending in March 2018 were just 2.4 percent. After deducting inflation of 2.4 percent, workers have received no real wage gains. This presents a sharp contrast with the experience of previous business cycles. When the unemployment rate hit cyclical lows, nominal wage gains were closer to 4 percent and real wage gains were roughly 1.5-2 percent for production and non-supervisory workers. After strong real wage gains during a period of low inflation in 2015-16, real wage gains for typical workers have been non-existent for the last year and a half.

Revitalizing wage growth is crucial to raising living standards and restoring the expectation that working hard will generate a better life.

The long-run picture is similarly dismal. After rising at roughly the same pace as productivity growth during the postwar decades, wages have grown more slowly since around 1980, and median wage growth since then has been just 0.4 percent a year. While non-wage compensation (i.e., health and retirement benefits) has grown slightly faster over that period, it explains only a small portion of the gap between wages and productivity. Wage gains for top earners and a smaller share of economic growth flowing to workers are core drivers of wage stagnation for typical workers.

Revitalizing wage growth is crucial to raising living standards and restoring the expectation that working hard will generate a better life. There is no silver bullet for lifting wage growth, but a range of policy proposals could improve outcomes for a wide range of workers. The Hamilton Project has just released a book detailing proposals that either in total or on their own could help push wage growth higher.

Part of the problem of weak wage growth is a consequence of changing work relationships in many industries: more concentrated employers with more bargaining power over workers, as well as a decline in private sector unions, have depressed workers’ wages. A range of policies—from wage transparency initiatives to modernized labor market standards—could improve worker’s ability to bargain for a raise. In addition, policies could be implemented to lift worker mobility and productivity, thereby helping workers to find higher-paying jobs. Finally, because wages depend on both the supply and demand for labor, macroeconomic policy can raise wage growth by ensuring a sufficient level of labor demand.

A number of specific policy actions could help revitalize wage growth:

This list, while lengthy, is far from exhaustive. There are many other strategies for enhancing wage growth, including educational policies aimed at improving worker skill levels and policies aimed at increasing entrepreneurship and innovation.

Although the economy has changed dramatically in recent decades, both productivity growth and bargaining power remain necessary to lift wage growth. Accordingly, public policies must be reformed to better prepare workers for the modern labor market and to improve their ability to bargain for their share of economic growth.