SAN FRANCISCO (Reuters) — Slow U.S. wage growth is the result of underlying shifts in the labour force rather than a sign of a weak job market, according to a short paper published Monday by the San Francisco Federal Reserve Bank.
The finding is significant because Fed officials have long puzzled over why wages have grown so slowly even as the unemployment rate has plummeted, with some worrying that the economy may not be as close to full employment as the current 4.9-per cent unemployment rate suggests.
In the paper, the researchers lay out two main reasons why wage growth has been stuck at just over two per cent, barely enough to outpace inflation: higher-paid baby boomers are retiring, and new jobs are being filled by lower-wage workers who were sidelined during the recession.
Together, those trends mean that wages are not growing as fast as they historically have done, the researchers said.
Indeed, they wrote, correcting for these trends shows that "wages are consistent with a strong labour market that is drawing low-wage workers into full-time employment."
If policymakers at other regional Fed banks and at the Fed's Washington headquarters find the new research compelling, it suggests that the Fed may be able to safely press ahead with rate rises without worrying too much that subdued wage growth signals trouble in the labor market.
Still, the researchers caution, the impact on inflation is unclear: if employers are able to keep the cost of wages low by hiring low-paid workers, inflation could stay muted, but if the lower-paid workers are less productive, then prices could rise if employers end up paying more to produce their goods.