The mystery of sluggish wage growth

As the U.S. economy has recovered from the Great Recession, unemployment has fallen to a 5.3 percent rate. Yet wages have shown very little growth. Why hasn't pay increased as the labor market has tightened?

One possible explanation is a change in the overall composition of jobs toward lower-paying occupations.

This shift could occur in two ways. First, during a recession, firms tend to lay off the least productive, lowest-paid workers. Then when the economy recovers, these workers are rehired. But because their wages tend to be lower than average, this tends to restrain overall growth in wages.

Second, because sluggish wage growth began decades before the recession -- that's one reason inequality has been increasing -- perhaps post-recession wage sluggishness is a continuation of the prerecession trend toward jobs becoming polarized because of technological change.

That is, new technology has eliminated middle-class jobs, splitting displaced workers into two groups, one getting better jobs, the other getting jobs that aren't as good. The balance of the two has led to sluggish wage growth.

What does the evidence say about the relationship between job composition and slow wage growth? Does it support either of these hypotheses? Researchers at the Federal Reserve Bank of Atlanta looked at this question and found that "changing industry-employment shares could not explain much of the sluggish growth in the average hourly earnings."

To arrive at this conclusion, economists John Robertson and Ellyn Terry of the Atlanta Fed's research department examined two worker characteristics known to have a significant impact on wages: age and education. Workers with a high school education, or less, tend to have lower wage growth. This is mainly because most of these workers earn the minimum wage, and the minimum wage doesn't grow very fast over time.

Older workers also tend to experience lower wage growth. Although they're highly experienced, which works in their favor, they also tend to be at or near the top of the wage distribution within their companies, and being close to the ceiling depresses wage growth. Because of this, the economists found, "In 2014, the median wage growth of workers over age 54 was around 1.2 percentage points lower than the overall median."

These two characteristics of the typical job have changed substantially over time. As the Atlanta Fed research noted, between 1997 and 2014 the proportion of workers over age 54 has more than doubled (from 12 percent to 25 percent) and the number of workers with more than a high school education has increased (from 37 percent to 51 percent).

The researchers also examined two job characteristics, the industry where the worker is employed and the worker's occupation. In general, the share of workers in service-producing industries has increased over time. Before 2011, service workers tended to have slightly higher wage growth rates, but current wage growth is lower. The share of professional jobs has also increased, and workers in professional jobs tend to have higher-than-average wage growth.

Overall, these four characteristics have opposing effects on wage growth. Some factors such as the aging of the workforce will depress wage growth, while others such as the rising share of professional workers will push in the opposite direction.

What's the overall result? The research finds that "Holding worker and job characteristics fixed at their 1997 shares raises the median wage growth in 2014 by only about 0.2 percentage point."

Therefore, changes in workforce composition driven by either the recession or technological change -- both of which are often suggested as reasons for the lack of wage growth -- do not appear to provide the explanation for stagnant worker incomes.