On November 25, Fed chair Jay Powell gave a speech titled "Building on the Gains from the Long Expansion," in which he observed that
Recent years' data paint a hopeful picture of more people in their prime years in the workforce and wages rising for low- and middle-income workers.
In making this point, Chair Powell used a cut of the Atlanta Fed's Wage Growth Tracker that looks at the median annual wage growth of workers in the lowest 25 percent of the wage distribution. As the following chart shows, the lowest-paid workers have been experiencing higher median wage growth (the blue line) in the last few years than workers overall (the green line). This reverses the pattern seen in the wake of the Great Recession, when median wage growth for lower-paid workers slowed by more than for workers overall.
The faster median wage growth for lower-wage workers shown in chart above has also translated into an increase in the relative median wage level of these workers. To see this, the following chart shows the median wage level for those in the lowest wage quartile relative to the median for all workers in the Wage Growth Tracker dataset.
The chart shows that for workers in lower-wage jobs, their relative median wage over the 2000s has deteriorated, and that erosion has reversed course only in the last few years. This reversal may reflect increasing tightness of the labor market for lower-wage jobs relative to other jobs over the last few years. The challenge of filling jobs requiring few skills is something we have been hearing about a lot recently from the businesses we talk to (for example, see here), and this sort of challenge could be behind higher wages for those workers. However, several state and local governments have increased the minimum wage in recent years, which would also push up the relative pay for those in the lowest-paid jobs.
Are the observations in the previous chart solely attributable to minimum wage increases? To get some idea, the next chart contrasts the relative median wage in states that increased their minimum wage at some point between 2014 and 2019 to those that did not. The blue line is the relative median wage of the lowest quartile in the 28 states that increased their minimum wage (23 states introduced new minimum wage levels, and five implemented increases legislated before 2014), and the green line is relative median wage for the states that did not increase their minimum wage.
We would expect to see a rise in the relative median wage in the states that raised their minimum wage, and indeed we do. For the group of states that increased minimum wages (the blue line), the relative median wage is now closer to that of states that did not increase their minimum wage (the green line). Interestingly, though, even in the "no increase" states, the relative median wage has improved, suggesting that the increased tightness of labor markets, or some other factor than hikes in state minimum wages, is playing a role in pushing up the pay for those in lower-wage jobs. Consistent with the message of Chair Powell's speech, the good news is that there is scope to continue to build on the gains from the long and ongoing expansion for workers at the bottom end of the wage distribution.
Here's a puzzle. Unemployment is at a historically low level, yet nominal wage growth is not even back to prerecession levels (see, for example, the Atlanta Fed's own Wage Growth Tracker). Why is wage growth not higher if the labor market is so tight? A recent article in the Wall Street Journal posited that the low rate of job-market churn likely explains slow wage growth. Switching jobs is typically lucrative because it tends to be going to a job that better uses the person's skills and hence offers higher pay. Job switchers can also help improve the bargaining position of job-stayers by inducing employers to pay more to retain them.
But is the job-switching rate really lower? A paper that Shigeru Fujita, Guiseppe Moscarini, and Fabien Postel-Vinay presented at the Atlanta Fed's 10th annual employment conference looked at a commonly used measure of employer-to-employer transitions. That measure, developed by Fed economists Bruce Fallick and Charles Fleischman in 2004, uses data from the Current Population Survey (CPS) on whether a person says that he or she has the same employer this month as last month. Job switchers are those reporting having a different employer. As the following chart shows, the Fallick and Fleischman data (the yellow line) support the Wall Street Journal story that the rate of job switching is much lower than it used to be.
Source Fujita et al. (2019)
However, Fujita and his coauthors discovered a potential problem with these data, noting that the CPS doesn't ask the same-employer question of all surveyed people who were employed in the prior month. Importantly, the incidence of missing answers has increased dramatically since the 2006, as the following chart shows.
Source Fujita et al. (2019)
If these missing answers were merely randomly distributed among job switchers and job stayers, then it wouldn't matter much for the Fallick-Fleischman measure. But Fujita et al. found that the missing answers were disproportionately from people who look more like job switchers in terms of observable characteristics such as age, marital status, education, industry, and occupation—making it likely that the Fallick-Fleischman measure undercounts job switchers.
The researchers developed a statistical adjustment to the Fallick-Fleischman measure to account for this bias (the blue line label our series in the following chart—this is the same as the first chart) that tells a somewhat different story than the original measure (yellow line).
Source Fujita et al. (2019)
In particular, the adjusted job-switching rate is only moderately lower than it was 20 years ago and has fully recovered from the decline experienced during the Great Recession. Although a decline in job switching might be a factor in the story behind low wage growth, based on this adjusted measure it doesn't seem like the dominant factor. The low wage growth puzzle remains a puzzle.