Falling Unemployment and Rising Wages No Longer Strongly Linked, Puzzling Economists

For six years, the US economy has grown. Unemployment has slowly dropped and overall the health of the American economy has returned to levels comparable to those before the housing boom and bust. Yet, in a turn that has left many economists scratching their heads, salaries have not risen in conjunction with the drop in unemployment as predicted.

For six years, the US economy has grown. Unemployment has slowly dropped and overall the health of the American economy has returned to levels comparable to those before the housing boom and bust. Yet, in a turn that has left many economists scratching their heads, salaries have not risen in conjunction with the drop in unemployment as predicted.

At one time, unemployment and pay rates moved in concert as reliably as supply and demand. But, during this economic rebuilding, the two have become unhitched. While more Americans are working, few have seen significant pay raises. This is problematic because it could lock a generation of American workers into pay ranges too low to support any improvement in life standards. In other words, someone who begins an entry-level job today may be stuck at wage levels that hardly increase, making their salary after several years of experience the same as their starting wage.

Reducing unemployment was once a sure way to increase salaries and allow for improving life standards. It has always been the “American Dream” that each generation should have a better standard of living than the previous, but this disconnect could signal an end to this tradition. It may also require economists to rethink the way they view unemployment and employee compensation.

Of course, some see a silver lining in this trend. As Former Treasury Secretary, Lawrence Summers, pointed out in an interview with Bloomberg Business, the lagging wage increases could allow the Federal Reserve to keep interest rates at their current lows, inviting even greater economic expansion without risking runaway inflation.

On the other hand, others feel that the wage increases are simply lagging behind their traditional partner of unemployment, and that the Fed should start raising interest rates soon as a prophylactic measure against inflation. This camp believes wages will inevitably rise in the near future and once they do, if the Fed has failed to correct with interest rate increases, it could have an adverse effect on the overall health of the post-recession American economy.

While observations about the effects of this disconnect range from optimistic to cautious, explanations as to why it has occurred generally fall into two categories. One thought is that the recession was actually so damaging that it left a vast pool of untapped talent from which employers are currently drawing. This has both created a misinterpretation of unemployment data and a surplus of qualified employees who get entry-level wages. This same camp also points out that employers may have continued paying retained employees the same wages during the recession, and are simply maintaining those same wages while hiring new employees at lower rates, skewing the results.

The second train of thought is that technology has caused the problem. Automation has taken over many jobs once performed by humans. This leaves available jobs in largely unskilled professions with lower pay rates.

Whatever the cause, this unusual lag between unemployment and wages has surprised many economists. As a result, businesses, investors, and others with an interest in predicting America’s economic future wonder whether traditional models can be trusted or whether the situation warrants developing a new model to account for the changing landscape of the American workplace.