Why Wages Are Stuck Even When Labor Is Scarce

(Bloomberg Opinion) -- Tight labor markets might be their own worst enemy.

Rock-bottom unemployment across the major economies hasn’t spurred a surge in wages or inflation. It keeps confounding observers as jobless rates plumb new depths almost every month: a 48-year low in the U.S., the lowest ever in Germany and a 43-year low in the U.K. (In Japan, where labor has its own quirks, the number is 2.4 percent.)

A decade after the fall of Lehman Brothers and the economic crisis that followed, we may still be looking at this puzzle the wrong way. What if the key lies as much within the structure of those same tight labor markets as it does with the usual culprits of globalization, robots and weaker unions? Andy Haldane, chief economist at the Bank of England, has some ideas.

Much depends on unraveling this conundrum. A better handle on the price of labor would equip central banks to set policy correctly. Basing rate increases on how growth, prices and jobs behaved in the past might lead officials to go too high too soon. On the other hand, failing to raise rates when pay finally spikes would force more drastic action later.

Haldane argues that big shifts in employment culture, workplace organization and contract arrangements — not just the headline jobs number each month — are overdue for some scrutiny.

In a speech this month, he acknowledged that people who quit their jobs to go to another employer were indeed getting bigger pay boosts. Those staying put have flat-lined.

“Despite a tightening labor market, companies have so far not felt compelled to pay up to any significant degree to retain workers,” he said. “The indirect, or behavioral, channel for pay pressures has largely been missing during the recent jobs recovery.”

As a practicing central banker, Haldane can’t put this bluntly, so I’ll help out: Those newspaper headlines splashing the lowest jobless rate since the pre-Thatcher era might as well be on another planet. Being employed is not what it used to be, now that wage growth is so uneven.

Haldane also points to changes in contracts. The gig economy has been a trendy notion, joining the more familiar experiences of temping, doing agency work or being self-employed. Some folks thrive on flexibility, but far more are fearful of it.

Haldane mused:

Why might companies have felt less need to pay up to retain staff than in the past? Equivalently, why might the pay power of existing workers have fallen?

One possible explanation is recent change in employment contracts. Although the cyclical degree of job insecurity has fallen as people have become less fearful of losing their job, there may have been a compensating rise in structural job insecurity as people have become more uncertain about their hours and income in a job.

He’s talking mainly about the U.K., but correlations with the U.S. are real. If Haldane is right, inflation might not fire in any significant way no matter how low unemployment goes.

Fair enough, if we talk about 3 percent unemployment. But how does an economy work when unemployment dips to 2 percent or 1 percent? It’s anyone’s guess.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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