g q last business cycle, wage gains were over 4%, and at the height of the dot.com bubble, wage gains were over 5% a year. Shouldn’t the current tight job market result in faster wage growth as employers compete for increasingly scarce workers? “ The answer is “not really,” and it’s for several reasons. The single most important reason for slow wage growth is weak labor productivity growth, or the increase in output per worker per hour. As firms pay workers more, they try to keep their profit margins up by squeezing out inefficiencies, and thus pay for the higher wages out of increased worker productivity. Back in the 1990s, labor productivity growth averaged about 3%/year. In the run-up to the housing bust, it was well over 2%. By contrast, today’s productivity growth is about 1%! As a result, employers are not so eager to raise wages as they tend to reduce profits. Another major reason is demographics. Twenty years ago, the Baby Boomers were all in their prime working years. Today, close to 11,000/day retire and are being replaced by Millennials. The problem is that since Millennials are just starting their careers, they earn considerably less than the retiring Boomers. More importantly, the number of Millennials entering the labor force numbers about 14,000/day, exceeding by about 3,000/day, or 90,000/ g g is currently closer to 4%. The final significant reason for slow wage growt of inflation. In the late 1990s, inflation, as measu CPI, was 3.5%/year, and was roughly 4%/year du housing boom. Since 2010, however, inflation ha markably tame, and has hovered right around 2% sult, employers have not had to increase pay tha keep up with inflation. If, for example, employer increase real pay by 1%/year during the housing would have meant pay raises of 5%; today, 3% wi There are, of course, many other reasons why w growth is weak. They include a decline in the str unions, the increased prevalence of non-compe in employment contracts, and global supply cha which reduce the bargaining power of workers. also been a steep decline in the number of new f part due to the rise of super-firms like Google, A and Facebook, which generally buy out any pote petitors, also reducing employer options. Last, b tainly not least, comes the dramatic rise in state requirements which make it much more difficul ployees to work in other states, even if good jobs same field are available. While wage growth is not as strong today as it ha prior recoveries, there are many reasons why. H labor productivity will improve going forward, a something that employers and employees both b from. In addition, it would be great to see states eliminate licensing requirements where possibl where that is not possible, encouraging reciproc state lines would be a great improvement. Page 6

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