Title: Unemployment and Wage Growth: Recent Cross-State Evidence
Abstract: Introduction and summary The current economic expansion, now the longest on record, has delivered the lowest unemployment rates in 30 years. Yet nominal wage growth has remained relatively contained. This failure of wages to accelerate more rapidly suggests to some a shift, or even a complete breakdown, in the historical relationship between unemployment and wage growth. However, looking across the years, the relationship between unemployment and wage growth has always been relatively loose, implying that it might take many years to conclusively identify even a significant change in the link between unemployment and wages. In this article, we look across the states for more timely evidence of a change in the relationship between unemployment and wage growth. We find, however, that even in recent years, there is a relatively robust, negative relationship between state unemployment rates, properly evaluated, and wage growth. In particular, states in which current unemployment rates are lower relative to their long-run averages tend to have faster wage growth than those in which unemployment is higher relative to average. We do find some evidence that the sensitivity of wage growth to unemployment may have decreased in recent years, but we consider that evidence to be somewhat weak. Before turning to the cross-state evidence, we briefly review some of the cross-year evidence that has led to speculation about a change in the relationship between unemployment and wage growth. That speculation has taken a number of forms, not all of which have been well reasoned. In particular, media analysts sometimes have characterized the lack of greater acceleration of nominal wages in the face of low unemployment as a failure of the of supply and in the labor market. But, the forces of supply and demand have direct implications not for nominal wage growth, but rather for real, or inflation-adjusted, wage growth. [1] Indeed, because nominal wage growth depends on the level of price inflation, which in turn depends on monetary policy, there is little reason to expect a long-run link between the level of nominal wage growth and unemployment. So it is not surprising that the statistical relationship between nominal wage growth and unemployment discovered by Phillips (1958) disappeared long ago. [2] A more serious question is whether there has been a change in the relationship between unemployment and the growth of wages relative to expected inflation. A rough indication of the time-series evidence on this question can be gleaned from figures 1 to 3, which are scatter plots of annual data on the excess of wage growth over the previous year's price inflation versus the natural logarithm of the annual unemployment rate. In each case price inflation is measured by the change in the log of the annual Consumer Price Index. The three figures differ, however, in their measures of wage growth. [3] In figure 1 wage growth is the change in the log of the annual average of the Bureau of Labor Statistics' (BLS) Average Hourly Earnings (AHE) series. This closely followed monthly wage measure is limited to the wage and salary earnings of the approximately 80 percent of private industry workers who are classified as production or nonsupervisory workers. In figure 2 wage growth is derived from the hourly compensation m easure from the BLS's productivity and cost data (Hourly Comp). This measure captures most wage and nonwage forms of compensation paid to all workers in the business sector and thus provides a superior measure of the compensation associated with an average hour of work. Finally, in figure 3 wage growth is given by the increase in the average value of the BLS's Employment Cost Index (ECI). This measure also reflects both wage and benefits costs for private employers and, in addition, adjusts for variation in the industrial and occupational mix of the labor force. Unfortunately, it only became available in 1983. …
Publication Year: 2000
Publication Date: 2000-06-22
Language: en
Type: article
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Cited By Count: 11
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