When labor markets tighten, wages are expected to rise. Basic economics tells us that when workers are in higher demand, employers should have to pay more for their services. But in recent years, as unemployment has fallen below 5 percent in the United States, wages have not been increasing as fast as in the past. Economists debate the reasons; workers grapple with the consequences.

Going against convention

The unemployment rate has fallen to a comfortable level, but wage growth is sluggish.

U.S. unemployment rate U.S. wage growth 10 % +7 % +1.9% in 2016 +6 8 +5 +4 6 +3 +2 4 +1 4.9% 0 2 –1 Nominal (not adjusted for inflation) –2 0 –3 ’93 ’16 ’93 ’16 U.S. unemployment rate U.S. wage growth 10 % +7 % +6 8 +5 +1.9% in 2016 +4 6 +3 +2 4.9% 4 +1 0 2 –1 –2 Nominal (not adjusted for inflation) 0 –3 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 Source: Organization for Economic Cooperation and Development

When the two trends are superimposed, the historical pattern in which wages pick up when unemployment falls has not held this time around.

Wages grow faster as unemployment falls. Wages are not growing as fast as they were during the last two instances in which unemployment was relatively low. Nor are they growing any faster than when unemployment was at its highest. Wage growth slows down as unemployment rises. ’93 ’00 ’10 ’16 Wages grow faster as unemployment falls. Wages are not growing as fast as they were during the last two instances in which unemployment was relatively low. Nor are they growing any faster than when unemployment was at its highest. Wage growth slows down as unemployment rises. ’93 ’00 ’10 ’16 Source: Organization for Economic Cooperation and Development

What is happening in other larger economies?

This is a global problem. Wages are not rising as fast as expected in many countries, especially Britain, France, the Netherlands and Norway.

UNITED STATES JAPAN +1.9% +0.8% 4.9% 3.1% ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 GERMANY BRITAIN +2.4% +1.9% 4.8% 4.1% ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 FRANCE ITALY 11.7% 10.1% +1.4% +0.8% ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 SPAIN NETHERLANDS 19.7% +1.1% 6.0% NO CHG. ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 NORWAY PORTUGAL 11.2% +1.4% +0.8% 4.7% ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 UNITED STATES JAPAN GERMANY BRITAIN FRANCE 10.1% +2.4% +1.9% +1.9% +1.4% +0.8% 4.9% 4.8% 4.1% 3.1% ’93 ’16 ’93 ’16 ’93 ’16 ’93 ’16 ’93 ’16 ITALY SPAIN NETHERLANDS NORWAY PORTUGAL 11.7% 19.7% 11.2% +1.4% +1.1% +0.8% +0.8% 6.0% NO CHG. 4.7% ’93 ’16 ’93 ’16 ’93 ’16 ’93 ’16 ’93 ’16 UNITED STATES JAPAN GERMANY BRITAIN FRANCE 10.1% +2.4% +1.9% +1.9% +1.4% +0.8% 4.9% 4.8% 4.1% 3.1% ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ITALY SPAIN NETHERLANDS NORWAY PORTUGAL 11.7% 19.7% 11.2% +1.4 % +1.1% +0.8% +0.8% 6.0% NO CHG. 4.7% ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 ’93 ’00 ’10 ’16 Source: Organization for Economic Cooperation and Development | Note: Data for each country are on comparable scales except for Spain and Portugal, which are on wider scales.

A hollowed-out labor market is partly to blame …

A fundamental refashioning of the labor market has been underway for two decades. Jobs that require middle-range skills have been declining, while those involving skills at both the lower and higher end of the spectrum have been growing. This effectively suppresses wages for many: People in lower-paid, lower-skill jobs — retail workers, janitors and home health aides — have little bargaining power to demand higher wages. Middle-skilled workers — including clerks, call center operators and factory workers — are being replaced by computers, robots and lesser-paid hands in low-wage countries. Higher-skilled workers are capturing an outsized share of pay.

Shift in occupations Lower skills Middle skills Higher skills Spain France Portugal Britain Norway Netherlands O.E.C.D. avg. Italy Germany United States Japan –10 –6 –2 +2 +6 +10 –10 –6 –2 +2 +6 +10 –10 –6 –2 +2 +6 +10 Percentage point change in share of total employment, 1995 to 2015 Shift in occupations Lower skills Middle skills Higher skills Spain France Portugal Britain Norway Netherlands O.E.C.D. avg. Italy Germany U.S. Japan –10 –6 –2 +2 +6 +10 –10 –6 –2 +2 +6 +10 –10 –6 –2 +2 +6 +10 Percentage point change in share of total employment, 1995 to 2015 Shift in occupations Lower skills Middle skills Higher skills Spain France Portugal Britain Norway Netherlands O.E.C.D. Italy Germany U.S. Japan +2 +6 +10 –10 –6 –2 +2 +6 +10 Percentage point change in share of total employment, 1995 to 2015 Source: Organization for Economic Cooperation and Development

… as is the decline of collective bargaining.

Union membership has been declining in much of the developed world. But in the United States, where it’s lower than in most major economies, unions now represent less than 11 percent of the workforce. Economists see this as a critical factor in weak American wage growth, given that most workers do not bargain collectively.

60 % Norway 50 Trade union memberships Percentage of employees 40 Italy 30 Britain Portugal Germany 20 Netherlands Japan Spain O.E.C.D. Total United States 10 France 0 ’94 ’14 Source: Organization for Economic Cooperation and Development

Growing inequality is a result.

Focusing on the United States again, inequality is worse compared with many other major economies.