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Wage stickiness

Unemployment has been a fixture in the news since 2008, but relatively little has been said about wages. So how have wages changed as the U.S. has weathered the Great Recession and the spike in unemployment? Most people would expect that wages have decreased, but data in FRED offer a different perspective. The graph above shows two time series from the Bureau of Labor Statistics: unemployment (red line) and private industry wages and salaries (green line) from the employment cost index. Note that even when unemployment rapidly doubled, the green wages line continued to rise (albeit at a reduced rate). In other words, as the economy contracted and employers sought to cut costs, they almost exclusively opted to lay off workers rather than negotiate for lower wages. This phenomenon is known as downward nominal wage rigidity: During macroeconomic shocks such as recessions, wages remain “sticky.” Of course, it’s possible that inflation is cutting real wages even if nominal wages aren’t changing. However, when we adjust the wages data for inflation in the graph below (blue line), the pattern remains similar. Although real wages posted a slight decline several years after the recession hit, it pales in comparison to six years of elevated unemployment.

How these graphs were created: For the first graph, search for and add the unemployment series (left y-axis) and the total wages series (right y-axis). For the second graph, add the wages series (a) and the consumer price index (b) as parts of a single data series. Do this using the “Modify Existing Series” option within “Add Data Series.” Set the units for both (a) and (b) to “Index” with the observation date equal to 2007-11-01. Then, in the “Create your own data transformation” option, enter “(a/b)*100” in the formula box and apply the transformation. For the trend line, choose “Trend Line” under “Add Data Series” and set the start date to 2007-10-01. Set both the start and end values to 100.

Suggested by Ian Tarr.

View on FRED, series used in this post: CPALTT01USM661S, ECIWAG, UNRATE

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