Here’s Why Wages May Be About to Start Growing

With unemployment hitting a 50-year low, when can we expect to see a spike in wage growth? This question has economists scratching their heads.

In May, unemployment hit 3.8 percent, and there are now more jobs available than there are workers to fill them. Still, wage growth remains stagnant, increasing just 2.7% since May of last year. When adjusted for inflation (which hit 2.5% in April), wages didn’t really increase at all. Plummeting unemployment coupled with effectively zero wage growth defies every law of supply and demand.

With a scarcity of workers and an abundance of jobs, we’d expect employers to be offering higher salaries and more benefits to court top talent. Instead, most firms are sitting on their pocketbooks and employees don’t seem to mind.

Here are a few trends happening right now to explain this puzzling paradox.

Those Darn Demographics

The repercussions of an aging U.S. population, dubbed the “silver tsunami,” could be partially to blame. The oldest Boomers turned 65 at the dawn of 2011 and 10,000 of them will reach retirement age every single day through 2030, according to Pew Research.

As many of these workers leave the labor market, they are being replaced by younger people or the previously unemployed: two populations that generally command lower wages. This is one clear reason why wage growth remains tepid, even in the midst of an overall labor shortage.

Luckily for job seekers, this particular roadblock to wage growth may be only temporary. As Millennials continue to gain skills and experience, they will gain more leverage to negotiate their salaries over time. They’ll also develop the confidence to quit their current jobs and look for better, higher-paying opportunities.

Do Not Pass Go, Do Not Collect $200

The rise of noncompete agreements and increasing industry concentration suggests monopoly power may be another factor influencing our stubborn wages.

Recent research has shown, nearly 20% of all U.S. workers are subject to non-compete agreements, and 60% of large U.S. franchises include anti-poaching clauses in employee contracts. This has created a power asymmetry between employers and employees, giving companies a disproportionate amount of control over worker mobility.

Traditionally, the best way to significantly increase one’s salary has been to leave your current job and find a better one. Noncompete agreements hamstring workers and limit their ability to leverage the experience they’ve gained into a better job at a competing firm.

Compounding the effect, industries are becoming more concentrated, with fewer firms producing a greater share of overall goods and services. More than 75% of U.S. industries have experienced increased concentration over the past two decades and the average publicly-traded company is now three times larger than it was 20 years ago.

As monopoly power increases, less competition occurs between companies in a given industry. This places downward pressure on wages, since workers have fewer employers to choose between and lose the bargaining power they would enjoy in a more diverse labor market.

To mitigate the monopoly effect and spur wage growth, regulators will have to continue closely monitoring megacorporations, and job seekers should consider jumping between industries to bypass noncompete agreements.

The Unemployment Rate Doesn’t Tell The Whole Story

A cornucopia of data can be used to gauge the health of the labor market. Despite this, economists and news outlets are hyper focused on the unemployment rate. While it’s undoubtedly a key metric for understanding the employment situation, it may not be the best for understanding competition in the labor market.

Another way to reconcile the disconnect between low unemployment and wages is to look at the percentage of prime working age people (25-54) who are actually employed. This figure last peaked just before the Great Recession, at 80.3%. The unemployment rate at this time was 4.6%.

Even though the unemployment rate today is nearly a full percentage point lower than it was in 2007, only 79% of the working-age population is currently employed—that’s about 1.2 million fewer people than were employed before the recession hit. With this in mind, our labor shortage isn’t as dire as it may seem, and employers might actually have more options than we think.

Still, most economic indicators suggest wages will eventually catch up as the job market continues to tighten. That is, if regulators keep a close eye on the growing monopoly power of large corporations and job seekers stop lowering their salary expectations.  

Written by

ZipRecruiter's Data Journalist, Jeffery writes about emerging job market trends using traditional and proprietary ZipRecruiter data.

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