It’s now safe to say that the U.S. economy is in a boom.
Small business leaders are saying it. Measures of business optimism, tracked by the National Federation of Independent Business, are at all-time highs:
These heady survey measures haven’t yet been matched by hard data, but the hard numbers are looking good too. Business investment as a percent of gross domestic product is almost as high as it’s been since the recession:
Meanwhile, broad measures of unemployment are as low as at the peak of the mid-2000s boom:
And job creation continues at a healthy clip.
In other words, it’s time to stop calling this a recovery, and start calling it a boom. This is very good news for President Donald Trump, whose 2020 re-election bid will be strengthened by good economic times, even though the degree to which presidential policies really affect the economy is dubious.
But one important economic indicator remains disturbingly subdued -- wages.
In dollar terms, wage growth has been superficially healthy -- in January, average hourly earnings rose 2.9% from a year earlier. But consumer prices increased 2.1% during the same period. In other words, real hourly earnings grew by only 0.8% -- less than half the real growth rate of the overall economy.
Meanwhile, the NFIB survey reports that 31% of employers are paying their workers more. But this is also presumably unadjusted for inflation. Because inflation is positive in most years, wages tend to go up on average every year. But that doesn’t mean workers are actually getting more purchasing power.
In terms of real wage growth, 2017 wasn't a great year, and for nonsupervisory workers, it was especially slow.
The biggest wage gains since the recession came in 2015, thanks to a fall in oil prices that held inflation down while dollar wages rose. Now, inflation is back to a more normal level, but dollar wages aren’t rising much faster, meaning that workers are pocketing fewer gains. Median real weekly earnings for American workers actually fell in late 2017 after hitting a plateau earlier in the year:
What’s going on? Why are low unemployment, robust business investment and soaring confidence measures not causing faster real wage growth? Basic economics -- the theory of supply and demand that every undergraduate learns in their introductory courses -- suggests that as labor markets get tighter, real wages should rise. So why is the theory not working?
One possible reason is that employers are growing increasingly powerful. Recent research by economists José Azar, Ioana Marinescu and Marshall Steinbaum has found that rising concentration in labor markets -- a decrease in the number of employers competing for workers -- has led to the suppression of wages. Another new paper by Efraim Benmelech, Nittai Bergman and Hyunseob Kim reached the same conclusion.
Economic theory says that when there are only a few employers, the supply-and-demand model breaks down, and powerful companies start holding wages below what a competitive market would provide. This theory also predicts that minimum wage laws wouldn’t throw people out of work -- exactly what many researchers are now finding.
A second possibility is that low unemployment is making workers less productive. When layoffs loom, employees tend to work harder in order to keep their jobs, but when the economy reaches full employment, the pressure comes off. Labor productivity isn’t perfectly correlated with wages, but it does have some effect.
A third possible reason is simply caution after the long, deep recession. Nominal wage cuts are very rare -- in econ jargon, wages are sticky downwards. So employers know that if they hand their workers raises, they won’t be able to take those raises back if the boom proves short-lived. Hence, burned by the experience of a lost decade, companies may be holding off on raising pay until they’re sure the good times are really back.
So there are both benign and malign explanations for why wages aren’t taking off. Economists are no doubt working even now to figure out what’s actually going on. But one thing is certain -- unless economic growth starts translating into bigger raises for the average American worker, the boom will feel hollow to many people.
By Noah Smith