Wages Are Low and Workers Are Scarce. Wait, What?

Across the country, there are more jobs available than there are workers looking for them, as the unemployment rate has dropped to a nearly two-decade low. Businesses are complaining of worker shortages, arguing they could do more and sell more and build more if they could just find the labor. Yet wages remain strikingly flat, with much of the raises that workers are making getting eaten up by inflation. Employees still somehow lack the power to cajole businesses into paying them more, nearly a decade into the recovery.

The central paradox of the Trump economy is that widespread concerns about labor shortages coexist with widespread complaints about low wages. But economists do not see it as much of a paradox—instead seeing it as a sign of dimming business dynamism and diminished worker power.

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Whatever its causes, the change is striking. The last time that the unemployment rate was this low, during the late Clinton presidency, year-on-year wage growth was roughly 5 percent. It is now just above 3 percent. Moreover, wage growth has not picked up much for the past three years, even as the jobless rate has dropped down to historically low levels.

This may reflect the inherent limitations of the unemployment rate as an economic indicator. During and after the Great Recession, millions of Americans dropped out of the labor force, unable to find a good job or any job at all. They went to school. They retired. They became unpaid caretakers. If they had a disability, they applied for insurance coverage. The share of prime-age adults with a job dropped from 80 percent to 75 percent. Now, even with the unemployment rate in the low single digits, it has not recovered to where it was before this recession or the prior one. There is still slack in the labor market, with hundreds of thousands of workers sitting on the sidelines.   

Economists point to another indicator to help explain the persistence of low wages in a climate of low unemployment: sluggish productivity. American businesses and workers are not getting more dynamic, more innovative, and more efficient—at least not like they were in the 1990s or the 1960s. That has the effect of smothering wage growth. “Wage growth feels low by historical standards and that's largely because productivity growth is low relative to historical standards,” said Mark Zandi, the chief economist at Moody’s Analytics. “Productivity growth between World War II and up through the Great Recession was, on average, 2 percent per annum. Since the recession 10 years ago, it’s been 1 percent.” Given those statistics, the sluggish pace of wage growth makes more sense, he said.

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Still, that analysis assumes that productivity gains translate into higher wages—and there are reasons to think that might be less true now than it has been in the past, as Zandi noted. Economists point to the long-term decline in worker bargaining power as part of the reason that employees’ paychecks are not rising right now. The share of employed workers who are members of a union has fallen in half since the 1980s. States have eroded labor standards and hampered collective bargaining. As a result, it is harder for workers to demand higher paychecks, year after year after year.

“Bargaining powers are additive,” said Heidi Shierholz, an economist at the Economic Policy Institute, a Washington-based think tank. “You get them not just from the tight labor market, but also from your union, and also from binding labor standards. When you have this big erosion in this set of things that give you bargaining power, it takes a tighter and tighter labor market and a lower and lower unemployment rate to translate into strong wage growth.” She added: “I don't think that link is broken. I just think the unemployment rate has to be that much lower to spur strong wage growth, given that all of these other forms of worker leverage have been decimated.”

Increasing market concentration is another sweeping factor. In a huge number of business sectors, from manufacturing to retail trade to finance, the top four firms have a bigger share of revenue now than they did in the late 1990s. Measures of aggregate business concentration have increased too. Walmart dominates bricks-and-mortar retail; Google dominates web search; Amazon dominates e-commerce; Uber and Lyft dominate rideshare. Growing monopoly power is present everywhere from hospital systems to rental car companies. This raises profits, slows economic growth, increases inequality, and, yes, suppresses wages. Workers, in effect, have fewer employers to choose from. Employers have more power to set workers’ wages at a low level.

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“We should be concerned about this agglomeration of market power not just because of its economic consequences, but also because of its political consequences,” Joseph Stiglitz, the Nobel laureate in economics, has argued. “An increase in economic inequality leads to an increase in political inequality, which can and has been used to create rules of the game that perpetuate economic inequality.”

More marginal causes are likely at work too. Roughly one in five workers are bound by a non-compete clause, which serves as an “intertemporal conduit of monopsony power” in the words of researchers. Such clauses can prevent workers from bargaining for a higher-paying job at a competing firm. Drug testing seems to stand in the way of some uncounted number of workers finding a job. And companies’ credential standards—which they inflated in the recession and just after, when there were millions of unemployed and underemployed workers with advanced degrees—might also be having an effect.  

Still, the tighter labor market should lead to widespread and stronger wage gains at some point, economists think, and hopefully soon. That is already true in communities and industries with very low unemployment rates. When companies cannot fill positions even after raising wages significantly—that will indicate real labor shortages. And for workers? It will feel like a very good thing.