For what feels like forever now, economists have been wondering and debating why pay isn’t rising faster, given the low unemployment rate. Often you hear this described as the “wage puzzle.” But at least a few economists—most notably Adam Ozimek of Moodys Analytics and Ernie Tedeschi of Evercore ISI—have argued that there really isn’t much of a mystery at all, if you look at the right data. Wages have been rising at roughly the rate you’d expect, given tightness of the labor market.
Wednesday offered a bit more data supporting their theory. The Bureau of Labor Statistics reported that, tracked by the employment cost index, wages and salaries for workers in private industry had increased by 3.1 percent during that year that ended in September. (The ECI tracks what employers are paying for the same sorts of jobs over time.) That, on its own, is good news. Pay growth is accelerating. The economy is doing that cool thing where wages go up.
And about that wage puzzle? Here’s what happens if you plot the employment cost-index against what I like to call the working-age employment rate—the share of 25- to 54-year-olds with jobs. The most recent quarter is shown as the red dot, which is pretty much smack-dab on the trend line.
I’ve previously called this figure “the one dumb chart that might explain the economy.” It’s dumb, because the thing just shows a simple correlation, and we all know correlations can be spurious. But it might explain the economy, because it suggests pretty convincingly that there’s still a relationship between wage growth and labor market slack—meaning the number of jobless would-be workers waiting for an opportunity. And it shows wage growth is pretty much right on schedule.
Not everybody believes that this chart tells us anything. Paul Krugman, for instance? Not a fan. (The arguments about it can get involved). Also, to be clear: It’s not tracking outright wage growth. The ECI keeps the composition of jobs steady, so it won’t be influenced, say, if more people start going into restaurant work than manufacturing. That’s why it’s good, in some people’s opinion, for tracking cyclical changes in the economy, as opposed to long-term secular shifts. But it doesn’t give an absolutely complete picture of wage growth. (Hourly wages have been accelerating too, but after inflation, growth has been pretty minimal this year.)
Also, just because wage growth is on schedule doesn’t mean it’s a good schedule. Maybe if unions were stronger or employers less powerful, pay would rise on a steeper curve. Again, this isn’t meant to show that everything is fine with the economy.
The graph also tells us that, while the economy is pretty good by the standards of the past decade, it could still be hotter (those dots in the upper right are the late 1990s, which is still the modern standard for a U.S. economy that’s really rolling). One more reason for the Federal Reserve to think about laying off those interest rate hikes.
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