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Markets and Economy

Why Aren’t Wages Rising Faster?

The headline unemployment rate sits at the lowest it’s been since the late 1960s, but workers aren’t seeing the pay increases that accompanied economic expansion in the past. Today’s wages may be affected by factors like low inflation and increased automation.

Although headline unemployment has fallen to a five-decade low, workers have seen relatively little in wage increases—despite strong demand for labor, private-sector compensation rose only 2.8 percent over the past year, running three-quarters of a point ahead of inflation. The current business cycle’s raises are falling far short of the rapid gains workers enjoyed during previous economic expansions.


In some respects, today’s cyclical pay trends are not unusual. Wage growth is finally starting to accelerate, rising along with worker productivity as competition for labor heats up. However, compensation has lagged behind broader economic growth for several decades, and an array of structural forces—such as low inflation and a rise in automation—are likely one explanation.

Small Raises Amid Tame Inflation

Soft inflation is one reason pay gains seem smaller today, and that’s not a bad thing. Workers may fondly recall paychecks reliably growing each year by 8 percent or more during the economic expansions of their youth, but it’s easy to forget that rapid inflation eroded the bulk of those annual raises.

Since the 1990s, inflation has been remarkably tame, hovering near the Federal Reserve’s 2 percent target. As a result, even a modest nominal raise can provide a meaningful boost for a worker’s purchasing power. Today’s employees may be seeing much smaller nominal raises—2 or 3 percent instead of 7 or 8 percent—but tame inflation means that real wages are still rising.

Labor’s Falling Share

Other structural shifts have been less benign for workers. Through much of the 1980s and ’90s, wage growth decoupled from productivity gains—so every year workers saw their labor create more wealth, but enjoyed relatively little of the gains.

The decoupling of wages and productivity was likely caused by technological shocks, such as the emergence of automation and advances in information technology. Capital investment in new labor-saving machines accounted for a disproportionate share of workers’ increasing productivity, and businesses were able to keep much of the return on their investment.

As a result, workers are now taking home a smaller slice of the nation’s economic pie. The share of aggregate domestic income paid as wages has fallen from a high of 58 percent in the early 1970s to just over 53 percent today. This trend has subsided in recent years, with wages once again rising roughly in tandem with productivity gains. But the ground lost in past decades has not been recovered.

Deregulation Limits Wage Growth

In an increasingly deregulated and globalized economy, a tight labor market no longer has the unlimited power to lift wages. In the past, large sectors of the economy were tightly regulated and dominated by a handful of large companies, which allowed businesses to recoup rising labor costs through higher retail prices. For example, in the 1960s and ‘70s, Detroit’s automakers could negotiate coordinated raises for their workers, confident that the virtually captive US market would continue to buy their vehicles.

Businesses can no longer count on consumers to shoulder rising labor costs. Globally competitive manufacturers know that their customers have other options—if a manufacturer hikes prices to offset the cost of higher wages, they likely will lose market share. Wages cannot rise faster than the market will bear. Notably, wage gains since 2007 have been strongest in the highly regulated utilities sector.

The decline of oligopoly may help prevent the inflationary spirals that often brought past business cycles to an end, and consumers certainly benefit from a more competitive marketplace. But the end of captive markets may also be limiting the pace at which wages can climb.

What Innovation Can Mean

Wage growth may surge in the coming years. As the economy heats up, businesses likely will invest in new labor-enhancing technologies. With compensation once again rising along with productivity, developments in automation and machine intelligence should boost earnings for workers with the right skills. Innovation may diminish the value of routine labor, but it holds great promise for workers in higher-value-added positions.

View our economic commentary disclaimer.

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