The Path of Wage Growth and Unemployment
Mary C. Daly, Bart Hobijn, and Timothy Ni
July 15, 2013



After the Great Recession, the fraction of U.S. workers whose wages were frozen reached a record high. Many employers would have preferred to cut wages, but couldn’t do so because of the reluctance of workers to accept reduced compensation. These pent-up wage cuts initially propped up wage growth, reduced hiring, and pushed up unemployment. But, over the past 2½ years, inflation has eroded the real value of frozen wages, slowing wage growth and reducing the unemployment rate. This is similar to, but more pronounced than, the pattern observed in past recessions.

During the most recent recession the unemployment rate jumped 5.6 percentage points, but wage growth slowed only modestly. The economy has been recovering for four years and unemployment has declined considerably, but wage growth has continued to slow. These patterns contradict standard economic models that hold that unemployment and wage growth normally are tightly related and move in opposite directions.



The Path of Wage Growth and Unemployment

Category: Think Tank, Wages & Income

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3 Responses to “The Path of Wage Growth and Unemployment”

  1. Petey Wheatstraw says:

    It’s different, this time. Long term, and on the down side.

  2. MarkKlose says:

    Elsby, Shin & Solon’s April paper offers important color on this issue as their research is based on a worker-by-worker micro database of nominal wage stickiness under adverse economic conditions, including the great recession. The data set includes over 40,000 workers drawn from the Current Population Survey. They make important observations about how low-skill workers get less weight in aggregate wage statistics during recessions than they do during expansions. This imparts a countercyclical bias in aggregate wage statistics, making workers’ real wage opportunities appear less procyclical than they really are.

  3. ciwood says:

    Wages were frozen for all Louisiana Higher Education faculty in 2008. This will be the fifth year that no one will receive a raise. I doubt that we are the only example of wage freezes for five straight years. All the faculty have cut spending drastically and optimism is difficult to find.