Investigating the Mystery of Weak Wage Growth


The Wall Street Journal proposes "Reluctance to Switch Jobs" explains wages. But the Atlanta Fed Macroblog says, nope.

A Wall Street Journal article says One Explanation for Weak Wage Growth: Workers’ Reluctance to Switch Jobs.

From London to Washington to Sydney, policy makers are puzzling over why workers’ pay has been rising only slowly even though official unemployment is at its lowest levels in decades.

That is surprising because changing jobs is often lucrative. U.S. workers who switch jobs gain 4% more pay on average than those who stay put, according to recent research by Giuseppe Moscarini, a labor economist at Yale University.

It is a crucial issue for central banks as they figure out how much to cut interest rates to support their softening economies. One of their key economic models, the so-called Phillips curve, predicted inflation would rise as unemployment fell. That hasn’t happened lately. Inflation remains below central banks’ targets across developed economies.

“Central banks should pay more attention to job switching and what it reveals about people’s preferences for the jobs they have,” Mr. Moscarini says.

The argument runs like this: Workers can demand higher wages only if they have outside offers, regardless of the unemployment rate. People who switch jobs tend to find work that better utilizes their skills, and therefore pays more. Job switchers also improve the bargaining position of workers who stay in their jobs, by encouraging employers to pay more to retain them.

Is Job Switching on the Decline?

John Robertson, a senior policy adviser in the Atlanta Fed's research asks Is Job Switching on the Decline?

Here's a puzzle. Unemployment is at a historically low level, yet nominal wage growth is not even back to prerecession levels (see, for example, the Atlanta Fed's own Wage Growth Tracker). Why is wage growth not higher if the labor market is so tight? A recent article in the Wall Street Journal posited that the low rate of job-market churn likely explains slow wage growth. Switching jobs is typically lucrative because it tends to be going to a job that better uses the person's skills and hence offers higher pay. Job switchers can also help improve the bargaining position of job-stayers by inducing employers to pay more to retain them.

But is the job-switching rate really lower? A paper that Shigeru Fujita, Guiseppe Moscarini, and Fabien Postel-Vinay presented at the Atlanta Fed's 10th annual employment conference looked at a commonly used measure of employer-to-employer transitions. That measure, developed by Fed economists Bruce Fallick and Charles Fleischman in 2004, uses data from the Current Population Survey (CPS) on whether a person says that he or she has the same employer this month as last month. Job switchers are those reporting having a different employer.

Fujita and his coauthors discovered a potential problem with these data, noting that the CPS doesn't ask the same-employer question of all surveyed people who were employed in the prior month. Importantly, the incidence of missing answers has increased dramatically since the 2006.

BLS Question Revision

The Shigeru Fujita, Guiseppe study noted a "dramatic and persistent jump in January 2007" of people staying in the same job.

The study reports "We now provide evidence that the likely culprit is another seemingly small change in the CPS interview protocol, the Respondent Identification Policy (RIP), introduced in that month."

Thus, there is no sudden dramatic change at all.

Jobertson concludes "The adjusted job-switching rate is only moderately lower than it was 20 years ago and has fully recovered from the decline experienced during the Great Recession. Although a decline in job switching might be a factor in the story behind low wage growth, based on this adjusted measure it doesn't seem like the dominant factor. The low wage growth puzzle remains a puzzle. "

Atlanta Fed Wage Growth Tracker

Weak Wage Growth?

  • The Atlanta Fed Wage Growth Tracker shows weak wage growth.
  • The Wall Street Journal article noted "weak wage growth" without posting any supporting data at all.

Instead of attempting to figure out why wage growth is weak, let's ask the correct question:

Is Wage Growth Really That Weak?

Is nominal wage growth weak because inflation is weak?

Of course, this pressumes one believes the CPI is an accurate measure.

Those those in school, those who have student loans, those wanting to buy a home, and those who buy their own health insurance will certainly scoff at purported measures of inflation.

Housing Bubble Reblown: Last Chance for a Good Price Was 7 Years Ago

Please note Housing Bubble Reblown: Last Chance for a Good Price Was 7 Years Ago.

Housing prices are no longer in the CPI. They should be.

I understand the argument that houses are a capital expense. But they are also a fundamental indicator of overall inflation.

Prior to 1997, home prices and rent rose at about the same rate. Since then there have been wild difference. The Fed has repeatedly ignored housing inflation.

Two Inflation Indexes

In 2013, I proposed calculation the CPI by substituting the Home Price Index (HPI) for Owner's Equivalent Rent. That chart shows the result.

In mid-2005, inflation, by my measure was running near 7% and the Fed was oblivious.

Please see my 2013 post, Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices for more on the HPI-CPI and for debunking standard measures of the CPI.

With that necessary diversion aside, let's return to the alleged "mystery" with a look at the Phillips Curve.

Phillips Curve Nonsense

The WSJ article says "One of their key economic models, the so-called Phillips curve, predicted inflation would rise as unemployment fell. That hasn’t happened lately."

Anyone citing the long-discredited Phillips Curve as an indicator is sure to get a blast from me.

In Search of the Phillips Curve

On January 15, I wrote Yet Another Fed Study Concludes Phillips Curve is Nonsense.

The Fed study concluded "In sum, a careful look at the wage Phillips curve across states yields little evidence supporting the contention that wage growth sharply rises as the labor market reaches especially tight conditions."

Head Scratching

The Phillips Curve never worked and never will.

Given that it is random, there will be random periods in which it appears to work and random periods that have economists scratching their heads.

Head scratching is happening again right now over alleged "mysteries" of weak wage growth coupled with fatally flawed studies on workers staying put.

Mike "Mish" Shedlock

Comments (36)
No. 1-19

Median incomes essentially stopped growing when unconstrained inflation became official policy by de linking from Gold.

Since then, the gains from virtually all and any productivity growth, has been shifted, by way of debasement, from wages to productive people, to "asset appreciation" handouts to the idle and connected.

You can't have both, as there is only so big a pool of growth across which to split the spoils. If there is X growth, the resulting spoils have to be split between wages, rents and profits. Since delinking, the rent seekers have been handed, as a matter of policy, near all the share of growth which in a free market would have showed up as increased wages. And are now increasingly being handed the share which would have gone to profits as well.


Reasons for weak wage growth: immigration (legal and illegal), off-shoring of service and manufacturing jobs.


so the conundrum continues . Maybe it's just supply/demand. (i.e unemployment is understated , hence plenty of supply not reflected in numbers - undocumented workers , high labor force non participation rate).


I don’t see why it is a complete mystery why wages are not going up very much for the vast majority of workers. I have given these four reasons here before, but I will give them again. Of course, this is not the complete answer, but it applies in a lot of cases:

Reason #1: Technology: As wages rise in many areas, there is an incentive to replace high paid workers with automation wherever possible. Example- drivers of massive trucks used in open pit mining and oil sands extraction were paid 100k-200k to drive these behemoths. Because of their high wages, there was tremendous incentive to find a way to replace them. As a result, they have been mostly replaced by self driving trucks. This is happening in many high wage areas, including the finance and investment industry.

Reason#2: Leverage (or lack of leverage): Most workers have very little leverage to push for higher wages unless they are truly indispensable to the company. If you are one of a thousand assembly line workers, who is easily replaced, you have no leverage to ask for higher wages. There are only a handful of workers in any company who are indispensable, and can negotiate large pay raises.

Reason #3: Decline of unions: The best way for large numbers of non-essential workers to get any leverage to demand higher wages is for them to negotiate as a group, rather than as individuals; hence a union. Since unions are in decline, very few workers have any leverage to get significant wage increases.

Reason #4: Global Competition: If a business in the US has high wages, but they have a lot of competition from businesses in countries with low wages, it makes it difficult for this business to compete on a level playing field. This forces them to suppress wage increases as much as possible.


I agree with Mish regarding the Phillips Curve. No one actually still believes it, do they? I also agree that, especially in recent years, wages have been rising faster than inflation. It should generally be true that wage change=inflation+productivity change. In recent years, I think that has been true, so I don't see a problem.

The one place i disagree with Mish in on his fascination with home prices versus OER. Yes, home prices rose faster than OER from 1997 to 2007, but from 2007 to 2012, OER was much, much higher. OER is clearly more stable, which is why it is preferred, but over the long run, it should be approximately equal, just as the CPI excluding food and energy is about the same as the full CPI over the longer term, just more stable.

A final question i was left with, regarding wage changes. Do "wages", as reported, include the value of stock options? What about benefits that the company pays for (i.e. health insurance). I suspect they do not, which would mean that employee wages are rising substantially faster than the reported numbers, but more and more of their "compensation" is in forms other than "wages".


I think that even though immigration is not huge, immigrants are competing for and drastically expanding the labor pool for middle income professional jobs. What I mean by this is that immigration can be largely segmented into two groups:

1.) Uneducated low income labor 2.) Graduate degrees and technical workers

The second group has a huge percentage of doctors, scientists, and software engineers. Its well known that in sillicon valley, over 75% of technical jobs are held by immigrants. If you look at the numbers for doctors, you also find a huge percentage are not American. Same for pharmacists, business analysts, etc.

I contend that the jobs paying 125k - 400k a year are directly competed for by a huge percentage of immigrants. It is suppressing the wages for middle income Americans and increasing competition. The immigration numbers can be deceiving given how small they are relative to the USA working population size, but when you drill down on labor pools, which labor pools immigrants are entering, and take a granular view of the situation, the cause and effect becomes very clear.


This is no mystery to anyone who has lived in the real world. The jobs, particularly in STEM, just aren't there. Even modestly advertised positions, especially in STEM, are pulling 50-100 applicants. Big brand name firms report receiving 1000+ applications per advertised job. With even a modest reduction in demand, the labour sector could experience hyperdeflation. Big brand name Silicon Valley employers don't even pay their STEM workers as much as mere police officers on average.


Money is ultimately worth what there is to buy with it. Over the long term they must track productivity times inflation. We've had yeas of stagnation in both


There are tons of entry level positions available. If you're over 50 you're a liability to anyone who's hiring because of the double whammy of starting to use health insurance and wanting enough money to service all the debt you've taken on over the years. Add to that if you want to relocate now you need two new jobs, one for you and one for your spouse. And maybe even a third or fourth for the kids who are still at home.


Increased corporate revenue is going to higher asset prices instead of higher wages as should be expected. It is also going to higher health insurance rates as should be expected in a non-market (price insensitive) system.

Wages only ever increase in heavily unionized economies, as should be expected.


employees bound to employer health care could be one reason employees are hesitant to make a switch as well as being saddled with a home one is not able to easily sell.


The FED understate inflation because there are many COLAs tied to it. Mainly Social Security. But when it comes to social security what they use for inflation makes sense because old people don't buy homes or need health insurance. There are 2 inflation rates in this country, One for retirees and one for people in their twenties. Retirees see far lower levels of inflation compared to those just starting out their adult life.


The reason for slower rates of worker pay and decreased rates of job changes is DEBT!!! Mish has discussed numerous times that debt pulls demand from the future, so there is less in future budgets going to pay for the present.

Companies are highly leveraged with debt. Customers are reaching their credit limits too, so labor costs cannot be passed along. Employers are not able / willing to pay more for labor.

Employees also have overextended their borrowing. The employee might not have enough credit to finance a move to a better paying job. Selling a house takes time, and home affordability is in a reblown bubble. There is little margin in pay increase to offset moving costs, time to sell a home, and hassle of moving.


Demand equals supply. Everything produced is bought, or there would be piles of surplus crap everywhere. Wages increase when productivity increases, making more stuff to be bought at no rise in prices, or wages increase due to inflation, without more stuff to be bought at higher prices. A less regulated economy permits productivity to improve at a faster rate. Debt is a problem. Loss of real capital to foreign enterprises is a problem. These are detrimental to capital expansion and increasing productivity.

Some nit was on here a few days ago talking about increasing employment by everyone deliberately doing less at work. So, lets see, if we all produced 20% less, how could we be better off? Sick of the dumb leftist ramblings about unions and free health care and labor faking and other counterproductive baloney by the trolls.


What about employment costs? As I understand it, it cost more and more to employ a person, and if a company pays for healthcare, the employee gets a 'raise' via the company still paying for healthcare.

Not to mention costs of regulations and other fees, how much does that add up to so that a company can't really raise wages?


I received an MBA from UC Berkeley in the late '80's, after having worked in a scientific technical field. It was obvious that the Phillips Curve,as well as much taught there, was complete hogwash. There was a time, before the establishment of the scientific method, where twits could suggest a pet idea that would catch on and become dogma. No need to test it or prove it. Lots of silly beliefs existed prior to the development oof the scientific method where hypotheses are actually tested for their predictive ability. And yet the charlatans remain, but in the soft sciences. I actually took a course taught by Yellen - nice old lady, but clueless dogma regurgitator. And that is how you get ahead. Also worked near Laura Tyson, an attractive leg crosser (and Bill Clinton likely agreed at the time), who, along with Yellen, proposed that the US should exit manufacturing, and focus on high tech fields where we had a lead at the time. Yellen became Fed head; Tyson, a Clinton economic advisor, and later, dean of the UC Berkeley Haas business school. Recall Sir James Goldsmith taking her apart on the Charley Rose show. History has judged that these "experts" are complete boobs.


I am not sure what the conclusion is. I understand about the flaws of the Phyllips Curve and the CPI, but if one needs to split hairs so much, then there is definitely a problem with wage growth. Healthy wage growth should be comfortably above the noise level of any benchmark, but it is not. Income for the 1% has clearly been growing even above 'flawed' benchmarks.

Much of the recent analysis on wage growth has been largely political in nature. Most of the effort to show that wages are growing fine comes predictably from the conservatives who are trying very hard that the recent conservative agenda is working (hint: it is another massive debt binge in disguise). But the case for good wages growth is based on faulty assumptions like: a) adding benefits to wages: since healthcare inflation is off the chart, this makes benefits grow faster than normal inflation, but this is an illusion. b) failing to account for the disappearance of defined benefits pension plans. c) failing to use measures of inflation for expenses that matter especially to middle class workers, like education.

When looking for reasons, I think most are off as well. I would look at issues like: a) the financialization of the economy and the rise of 'rentier' capitalism, which prompts companies to play financial engineering and not invest in productivity increases. b) lack of high value added skills by the population at large. c) consolidation in many industry sectors: there is no real competition for workers in monopolized markets. ....


What's wrong? This is how the system was designed. Fuck the working class, fuck the middle class. Turn the economy into a FIRE economy where 90% of wealth goes to the 1%.
Does anyone believe that wages are low because people are too lazy to move? Sounds like more Boomer bullshit. "Oh, those lazy Millenials. They could earn 100$ an hour with full benefits if only they moved to Arkansas and worked in the coal mines!" LOL Meanwhile assets keep rising. Sooner or later, the Boomer cunts who destroyed the economy will try to sell their homes and stocks and whatever to fund their lavish retirements. And then they will once again complain that Millenials and other newer generations are too lazy, liberal, retarded, stupid, etc. to buy their houses. America should be plowed under and given back to the Indians.

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