Wages Are Increasing, But What's Behind It?

Enlarge this image toggle caption David McNew/Getty Images David McNew/Getty Images

The Great Recession ended 7 1/2 years ago, and job gains have been steady since, but greater demand for workers is only starting to increase pay.

The increases are still relatively modest, and the data are still mixed. In October, for example, the Labor Department reported average hourly earnings increased at a 2.8 percent rate — the highest since mid-2009, but wage growth slowed in November. A separate report this month showed the cost of labor — another measure of wage growth — increased especially during the spring of this year.

What's driving the recent wage growth is unclear.

"The mystery has been that we've seen a decline in the unemployment rate, but we haven't seen the kind of increases in wage growth that we would expect," says Michael Strain, director of economic policy studies at the conservative American Enterprise Institute.

He speculates that until recently, employers figured they didn't have to increase wages, because in recent years so many people had stopped working or looking for work.

"Businesses kind of have the sense that [the missing workers] are out there — they are a pool of available workers — so that has, I think, suppressed wage growth," Strain says.

This year, that finally appears to be changing, and Strain and others believe wage growth will continue into next year, chiefly because the supply of labor is declining. The unemployment rate, at 4.6 percent, is near a level economists say is close to a "natural" unemployment rate.

New state and local minimum wage laws are another reason wages are rising. Since 2014, 21 states and Washington, D.C., changed their minimum wage laws. Last month, voters approved initiatives in Arizona, Colorado, Maine and Washington state. And more increases are expected in the coming year.

Strain says those increases have a ripple effect beyond just the lowest paid workers. Many union contracts, for example, benchmark to the minimum wage.

"There's no question minimum wage increases cause wage growth to accelerate," he says. "How much of that can be attributed to minimum wage increases is an open question."

In Anggie Godoy's case, minimum wage hikes made a big difference. She started working as a McDonald's drive-through cashier three years ago, making $8 an hour. Since then, the Los Angeles City Council raised the minimum wage to $10.50. Without the city's new law, Godoy says, she would only have seen a tiny increase.

Enlarge this image toggle caption Courtesy of Fight for 15 Courtesy of Fight for 15

"Working three years there, I only got a 10-cent raise," she says.

Godoy, who participated in fast-food workers' strikes demanding a $15 hourly wage, says that as her wages increased, so did wages for those in more senior positions.

Andrew Chamberlain, chief economist for online job site Glassdoor, says Godoy is right.

"Like dominoes up the pay scale, you see wage hikes all across the board," he says.

But minimum wage isn't the biggest factor, Chamberlain says, citing Glassdoor's data that show the most in-demand jobs are those whose pay is increasing fastest: truck drivers, construction workers and machine operators. That is not true for some white-collar jobs — sales jobs and financial analysts, for example, which are losing ground.

"Clever coders are finding ways to program around them," Chamberlain says. "Insurance agents today are largely being replaced by self-service insurance websites."

David Levine, CEO of the American Sustainable Business Council, a progressive advocacy group, says increasing pay can be a way to address another labor-market problem: low productivity growth.

"With that retention they're also getting employees that are more committed to the business, therefore productivity goes up," he argues.

Simply put: You pay more to get more.