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Sagging productivity behind slow U.S. wage gains, Fed study finds

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Reuters

By Jonathan Spicer

(Reuters) - Prospects may be dim for American workers looking for wage gains in the years ahead, according to Cleveland Federal Reserve research that finds that gains partly hinge on U.S. productivity and labour's share of income, both of which have been dropping.

Economists at the Cleveland Fed conclude that these longer-term changes in the U.S. economy, which have picked up over the last decade, played a role in the slow real wage growth since the 2007-2009 recession.

In a puzzle for Fed policymakers looking to raise interest rates this year, average real U.S. earnings rose only 1.2 percent in 2014 even while unemployment fell sharply and while the economy added more than 3 million jobs. Fed Chair Janet Yellen has said policymakers are watching wages and other factors as they decide when to tighten monetary policy.

 

The Cleveland Fed economists expect wages to tick higher in the short term, but any gains may be short-lived. Labour productivity has been declining for a decade, and for even longer, workers have been earning less overall income relative to the owners of capital.

"In the longer run, whether average real wage growth remains lower than in the past will depend on whether trend productivity growth continues to be low and whether other fundamental economic forces cause further declines in the labour share of income," Filippo Occhino and Timothy Stehulak wrote in the paper published on Thursday.

Non-farm productivity growth has averaged about 1.5 percent since 2004, and only 0.85 percent since 2010.

Meanwhile, labour's share of income has eased since the 1960s. But since 2000, it has receded five times faster due in part to technology and globalisation, cutting about 0.4 percentage points from average annual real wage growth, the Cleveland Fed economists said.

Their findings could boost the arguments of those, such as former Treasury Secretary Lawrence Summers, who warn that the U.S. economy risks entering a "secular stagnation" of lower longer-term growth, productivity and interest rates.

In an interview, Occhino said it was unlikely that such stagnation would take hold in the United States. "These are not necessarily trends that will continue indefinitely," he said, acknowledging that a "strong pickup" in productivity was unlikely.

(Reporting by Jonathan Spicer in New York; Editing by Lisa Shumaker)

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First Published: Apr 10 2015 | 1:38 AM IST

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