The Path of Wage Growth and Unemployment

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Guideline

Ø Purpose of the Article Ø Article: Research FindingsØ Interpreting ResultsØ New FindingsØ Global Implications & ConcernsØ References

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Purpose of the Article

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§ Standard economic models: unemployment and wage growth are tightly related

and move in opposite directions

§ However, this pattern has not been sustained during past recessions / recovery

Why? What happened?

§ In recessions, unemployment rate jumped but wage growth slowed only modestly or frozen

§ During recovery, unemployment declined considerably but wage growth continued to slow

§ Downward nominal wage rigidity played an important role in explaining the contradiction

between unemployment rate and wage growth

Article: Research Findings

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§ Used 3 different approaches:1. Distribution of wage changes in 2006 and 2011

2. Workers with no wage change

3. Clockwise loops in the wage Phillips curve

§ Employers: reluctant to adjust wages immediately and hesitate to reduce wages

§ Workers: reluctant to accept wage cuts even during recessions

What is downward nominal wage rigidity?

How to prove downward nominal wage rigidity?

Article: Research Findings

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Distribution of wage changes

§ Data cover all workers and measure how wages compared with previous year’s wages

§ 2011 and 2006 spiked at zero, suggesting frozen wages and consistent with

downward nominal wage rigidity

Article: Research Findings

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Workers with no Wage Change

§ Graph shows the share of workers with no wage change year-over-year

§ Consistent with the downward nominal wage rigid

Article: Research Findings

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Clockwise loops in the wage Phillips curve

§ Wage growth vs changes in unemployment relative to its natural rate (unemployment gap)

§ As labor market weakens ( unemployment gap), wage growth will fall, and vice versa

§ Relationship breaks down during and after recessions

Interpreting Results

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Recession Businesses- Wages- Cannot (DNWR)

Wages- Above Optimal- Lay-off- Fewer Hiring Normal- Wages growth slow less normal / frozen

Unemployment- Rate more normal- Wages not Flexible

Early Recovery

Wages- Wages growth slow- Wages frozen

Unemployment- Rate / Gap

Businesses- Demand Labor - More Hiring

But wages still…

DNWR unemployment gap vs wage growth divergefrom normal relationship

Is that true?

New Findings

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The article focused on the US economy as a whole

But what about different sectors, other countries and other

explanations besides downward nominal wage rigidity?

§ US 4 large different sectors (Research Fed San Francisco)

§ Wage and Unemployment Rate trend in the Eurozone (HSBC Economic Report)

§ Another explanation for the relationship between the US variables (Research Fed San Francisco)

§ Our research brings more insight and shows similar trends in different sectors / countries:

New Findings

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US 4 large different sectors

§ US as a whole shows negative wage gap (-1.0)

§ US construction sector shows a higher negative gap (-2.3)

§ But US FIRE sectors show positive wage gap (+0.4)

§ Sectors where wages are more rigid show largest

bends in their wage price Phillips curves

New Findings

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Wage Growth and Unemployment Rate trend in the Eurozone

§ Wages are stalling and unemployment rate is decreasing

§ People may have a job but work more hours for less

§ Companies growing are reluctant to pass on some of the cash to wages because expected

increases in energy prices could push up costs

New Findings

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Another explanation for the relationship between the variables

§ Composition of employment (from specific group to full-time)

§ Employers keep wage bills low – replace / expand staff with lower-paid workers

§ Main drag on wage growth from part-time to full-time and at below-median wages

§ Workers entering from outside the labor force to full-time also at below-median wages

§ Baby boomers senior full-time employed retire and Silver Tsunami

Global Implications & Concerns

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§ Labor costs and Inflation: labor cost pressures for higher price inflation could remain muted for some time

§ Wages Growth Frozen or Less Growth: lower income, less spending, lower investment and GDP

§ Lower Productivity: less competitive in the Global Economy and lower expected GDP growth rates

§ Lower GDP: higher unemployment

Major Possible Implications

Concerns for Managers§ Lower-wage workers are less productive? Hiding behind low readings on aggregate wage growth?

§ Trade-Off: less skilled workers receive lower wages but their productivity can be lower

§ Impact in the Short-Run: lower wages reflect lower costs and greater profitability for companies

§ Impact in the Medium / Long-Run: lower productivity may decrease competitiveness in the Global

Environment, leading to lower market shares, profits and stock prices

References

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Ø Articles & Websites§ Daly, M. C., Hobijn, B., & Ni, T., The Path of Wage Growth and Unemployment, Federal Reserve Bank of San Francisco, Economic Letter, No. 2013-20,

July 15 2013. Retrieved from http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/wages-unemployment-rate/

§ Daly, M. C., & Hobijn, B. , Why Is Wage Growth So Slow?, Federal Reserve Bank of San Francisco, Economic Letter, No. 2015-01, January 5 2015. Retrieved from http://www.frbsf.org/economic-research/publications/economic-letter/2015/january/unemployment-wages-labor-market-recession/

§ Daly, M. C., Hobijn, B. & P., Benjamin, What's Up with Wage Growth?, Federal Reserve Bank of San Francisco, Economic Letter, No. 2016-07, March 7 2016. Retrieved from http://www.frbsf.org/economic-research/publications/economic-letter/2016/march/slow-wage-growth-and-the-labor-market

§ B., Lianna, The most crucial part of Europe's economic recovery right now is crumbling, HSBC Report, September 12 2016. Retrieved from http://www.businessinsider.com/hsbc-report-eurozone-inflation-wage-growth-unemployment-2016-9?r=UK&IR=T

Ø Data

§ US Current Population Surveys

§ Article author’s calculations

§ Bureau of Labor Statistics

§ ECB and Eurostat

§ OECD

§ Trading Economics