Tighter labor market won’t cause spike in wages, researchers say

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Extremely tight labor market conditions don’t necessarily mean much higher wage growth, according to Federal Reserve Bank of San Francisco researchers.

While wages have risen since the Great Recession, the gains have not been commensurate with “the pace of labor market tightening.” The Phillips curve, which shows the relationship between the labor market and wage growth “has flattened somewhat over time, which is consistent with the subdued pickup in wage growth nationally,” write Sylvain Leduc, director of the Bank’s Economic Research Department, Chitra Marti a research associate in the department, and Daniel J. Wilson vice president of the department in an Economic Letter.

“[A] careful look at the wage Phillips curve across states yields little evidence supporting the contention that wage growth sharply rises as the labor market reaches especially tight conditions,” the authors write. “Of course, the current period may be different from the past.”

Currently labor market tightness is widespread, which cuts down geographical labor mobility, which can tamp wage pressures in tight labor markets.

“With this caveat in mind, given the historical experiences of states in recent decades, we do not foresee a sharp pickup in wage growth nationally if the labor market continues to tighten as many anticipate,” the authors write.

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Economy Federal Reserve Bank of San Francisco