Retiring baby boomers might be the answer to the mystery of why wage growth remains soft in what appears to be a tight labor market.

The unemployment rate fell last month to match the lowest level in 16 years, and businesses including restaurants and technology firms say they can’t find enough workers. Those conditions should--theoretically--cause wages to rise more quickly.

That hasn’t happened. Average hourly wages are growing at a slightly slower pace over the past 12 months compared with the prior year, according to the Labor Department. Median weekly earnings are growing at a better rate, but gains have been subdued since the recession ended more than eight years ago.

Typically modest wage growth would point to remaining slack in the labor market. But that’s not the case, according to updated research from the Federal Reserve Bank of San Francisco.

“While higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs,” paper authors Mary C. Daly, Bart Hobijn, and Benjamin Pyle wrote. “Together these two changes have held down measures of wage growth.”





Ms. Daly and Mr. Pyle are economists at the San Francisco Fed. Mr. Hobijn is a professor of economics at Arizona State University. The latest findings update a paper published last year.

Their research showed wage gains for continuously employed, full-time workers have improved more rapidly over the past three years, as the labor market tightened. That’s consistent with economists’ expectations for growth.

To meet the demands of an economy growing at a steady, if unspectacular, rate, employers hired new workers.

“The vast majority of these new workers earn less than the typical full-time employee, so their entry pushes down the average wage,” the researchers wrote.

The finding is catching the attention of monetary policy makers. Minutes from the July meeting of the Federal Reserve's policy-making body, released Wednesday, said a few participants suggested "wage growth was being held down by compositional changes in employment associated with the hiring of less experienced workers."

Soft wage growth is one factor that holds back broader inflation. The Fed’s preferred inflation measure has undershot the central bank’s target for 2% annual price growth for all but two months in the past five years. Weak inflation could complicate policy makers' calculation on whether to raise the Fed’s benchmark interest rate once more this year after raising the rate three times since December.

“As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time,” the San Francisco researchers wrote.


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