President Trump has positioned himself as a job creator in the run-up to the 2020 elections. With the unemployment rate at a 50-plus-year low at 3.5%, he has a historically low jobless number heading into campaign season.
But wage growth has been sluggish despite years of low unemployment, a disappointment that is attributable, at least partly, to the fact that many people in recent years entered the labor market and have secured jobs. That’s good for workers and families, but it also gives employers more hiring options that depress wages.
“If the participation rate remained as low today as it was four or six years ago, wages probably would have inched up a little faster,” said Gary Burtless, a senior fellow of economic studies at the Brookings Institution.
The participation rate refers to the share of people who are looking for work or are employed. The participation rate was 62.8% when Trump took office, according to the Bureau of Labor Statistics, after years of decline and then stagnation in the aftermath of the financial crisis. During Trump’s tenure, participation appears to have edged up, from 62.8% to 63.2%.
That slight increase is particularly significant given demographic pressures weighing against workforce participation, particularly the aging of the country. It represents a difference of millions of workers.
And as more people enter the market, employers have more choice in who they hire and what to pay them, keeping wages lower.
“People are coming to the labor market and providing more supply, and that’s a great thing … Nonetheless, it represents more labor supply and may be holding down wages,” said Federal Reserve Chairman Jerome Powell during a press conference on the central bank’s most recent monetary policy decision. He added, “It’s a bit surprising that with sustained levels of historically low unemployment, we haven’t seen wages moving up.”
Past recoveries had more robust wage growth.
“There’s been periods in the past where we have had rising participation rates and rising wages,” Burtless said.
During the economic recovery of the 1990s, the participation rate increased from 66.4% to 67.1%, and wages soared, according to the Economic Policy Institute. Its report shows the disparity in pay increases between the economic recovery of the 1990s and the current recovery.
Between 1996 and 2000, wage growth increased 9.9% for white men, 10.3% for black men, 9.4% for white women, and 9.2% for black women. In today’s recovery, from 2015 to 2019, wage growth increased 6.6% for white men, 5% for black men, 6.4% for white women, and 4.7% for black women, according to the EPI report.
The report states that unemployment rates in the current economy are similar to what occurred in the late 1990s, but today’s wages have not grown nearly as fast as they did in the ’90s.
Productivity is one reason wage growth from the 1990s outpaced the current cycle. The amount of goods and services produced by workers is currently lower than in the past, which means businesses sell less, which negatively affects wages. The productivity rate in the fourth quarter of 2019 grew at 1.9%, according to the Labor Department. Productivity between 1996 and 2000 averaged 2.8%, according to a 2008 Journal of Economic Perspectives study that looked at U.S. productivity growth.
“Productivity has been inching up, but it hasn’t been growing like it did in the period from the 1940s to 1973, or in the period from 1995 to 2005. Productivity is going at a fairly slow rate, and consequently, I think real wages are growing [at] a slow rate,” Burtless said.
Another issue stagnating wage growth is that employers are hiring people who, in the past, would not be considered employable.
“We have seen some signs that employers are reaching out to workers who, traditionally, they would not hire: people on disability, people who have a history of incarceration, and so on,” said Aparna Mathur, resident scholar in economic policy at the American Enterprise Institute. “It’s possible if you start reaching out to these workers, the expectation is that wages will be pretty low.”
Mathur notes that there is a “mix of factors” in slowing wage growth.
“There are a number of contributing factors. It’s hard to explain that this [labor participation rate] is the only reason why wage growth has been slow,” she said, adding, “I think that [labor participation rate] is contributing to a lack of wage growth and suggests that there is a significant amount of slack in the labor market.”
