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An Off-Kilter Expansion: Slack Job Market Continues to Hurt Wage Growth

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Abstract:

A few weeks back, on a late July morning, the U.S. government released two statistical reports that, taken together, provide an excellent microcosm of the current U.S. job market. One report showed that the overall economy was expanding smartly, suggesting the four-year-old economic expansion was solidly on track. The other report, however, painted a very different picture. This report--on wages and compensation-- revealed that average wage growth had yet again failed to beat inflation. In fact, the wage growth cited in the report was tied with the previous three quarters' results for the worst on record.

This report presents a set of wage and compensation trends in detail and then explains the underlying factors driving these trends. The conclusion drawn from this analysis is that, despite what appears to be a low unemployment rate, considerable slack remains in the job market.

Earlier research shows that a truly tight job market plays the critical role of broadly distributing the benefits of growth (Bernstein and Baker 2003). Specifically, in a full-employment job market, with the number of jobs available matched fairly tightly to the number of workers, employers tend to bid compensation up to recruit and keep the workers they need. That mechanism, inoperative thus far in this expansion, is one way of ensuring that the benefits of growth are fairly shared.