Microeconomics Principles in Details

In the article Unemployment in the United States Is Falling, So Why Isn’t Wage Growth? Coy (2017) discusses the peculiar behavior of the US labor market. According to the April Job Survey, the unemployment rate of 4.4 percent is the lowest in a decade, but despite this being commendable, earnings have risen at a slower rate. For example, when the unemployment rate was 4.4 percent, hourly earnings for all private nonfarm jobs rose by 2.5 percent, compared to 4 percent when the unemployment rate was 4.4 percent. According to Coy (2017), something must have happened to the logical link that exists between unemployment and wages and therefore, he provides various theories that might explain why the wage growth rate is lower when unemployment is at its highest.

The first reason the article proposes is that Philip’s Curve is dead. The Philips curve shows the relationship between the rates of inflation (wages growth) and unemployment rates. It found out that there exists a consistent inverse relationship among the two, that is, when unemployment is low, wage growth is faster, and when unemployment is high, wages rise at a slower rate (Hoover, 2017). A low unemployment rate represents a tight labor market, and in such a situation, firms have to raise their wages to attract working force. However, over the past few years, the applicability of this curve in modern economies has been heavily criticized, and the U.S labor market does not follow its principle. According to Nicolini & Fitzgerald (2013), research over the past forty years has cast doubt on the existence of a stable inverse relationship between inflation and unemployment and this also affects the effectiveness of monetary policy on unemployment.

From Philip’s curve below, it can be seen that there is an inverse relationship between unemployment rate and the rate of inflation. In the U.S labor market, the expectation according to the Philips Curve is that at the low rate of unemployment, the wages growth rate would be higher but this is not the case. Therefore, as the article suggest, it seems that this curve might not be relevant in predicting the relationship between wages and unemployment in an advanced economy such as the U.S.

Inflation

Unemployment rate

Cox (2017) also points out that the wage growth rate is slower as a result of a weakening bargaining power of the workers. A primary reason for this is the lower influence of labor unions. According to Freedman & Hilbrich (2013), workers form unions because they have similar interests such as better wages, family leaves, better benefits and also due to the possibility of advancement. Therefore, they have a greater bargaining power as a union than individually, and they have a monopoly where they can promote the workers interests against the employers. However, the union density in the U.S has been declining particularly in the private sector, and Freedman & Hilbrich (2013) attribute this mainly to the shift from blue-collar jobs to white-collar service jobs. Unions were most predominant in the manufacturing industry where they could fight for the rights of workers, but the recent shift to white collar service jobs has reduced their influence. Outsourcing of most of the manufacturing jobs is occurring to lower-wage countries such as China, and there is a new shift of outsourcing non-core services such as cleaning and maintenance. U.S firms have also stiffened their stance against labor unions, and in the face of the change in jobs, their influence has been reduced.

Mischler (2014) reiterates the fact that trade union membership in the U.S is at its lowest point in decades with technology and globalization as the main factors for its decline. Industries such as steel and automobile where trade unions dominated are shifting their locations out of the U.S and have significantly downsized their workforce. The white-collar jobs are also under the threat of outsourcing to lower wage area, and the effect is that workers are losing their bargaining strength. The result of the weakening labor unions is that the American workers perform longer hours for lower pay and benefits compared to other areas in the world (Mischler, 2014). In addition, it has led to greater income and economic inequality where more than half of the wealth is in the control of a few individuals while the workers are all at the bottom.

Another explanation for the low wage growth is the fact that the conditions of the labor market affect high income and low-income earners differently (Wiczer & Eubanks, 2014). Workers who earn more than the medium wage are treated more favorably because they can move from one employment to another with greater ease and have a slightly higher bargaining power. However, employees who earn lower than the medium pay are facing a situation where their routine nature jobs are not growing, and as a result, they are not able to move from job to job. Therefore, they have lower alternatives, and their wages remain stagnant over a longer period (Wiczer & Eubanks, 2014).

Policy Recommendations

Addressing the issue of the weak growth in wages is not an easy issue, and it requires the input of the employers and decision-makers. However, according to Alexander & Haley-Lock (2015), measures such as the enforcement of the minimum wage and employment standard, enabling the workers to access unions and engage in collective bargaining and Federal Government expansion of public-private investments especially in education, can improve the salaries of the low-wage workers. Also, the problem of employees’ productivity must be resolved and firms, as well as the government, must take the initiative to improve labor productivity. Programs to promote productivity include employee engagement such as training and development programs, education reforms such as making the college more affordable to enable workers to enhance their education and gain more skills.

The excessive focus on lower costs and higher profits has resulted in companies outsourcing most of their operations to offshore locations. Since increasing number of companies are outsourcing jobs such as customer service, accounting, and engineering among others, many workers are losing their jobs or have to work for considerably lower wages, the policymakers are not doing enough to assist the affected individuals. The government can address this issue by encouraging companies to take greater responsibility and share liability with the subcontractors. The Federal government should come up with ways to offer incentives to corporations such as equitable tax policies and reduce regulations such as better trading laws in efforts to encourage investments in America.

References

Alexander, C., & Haley‐Lock, A. (2015). Underwork, Work‐Hour Insecurity, and A New Approach to Wage and Hour Regulation. Industrial Relations: A Journal of Economy and Society, 54(4), 695-716

Coy, M. (2017). Unemployment in the U.S. Is Falling, So Why Isn’t Pay Rising?. Bloomberg.com. Retrieved from https://www.bloomberg.com/news/articles/2017-05-19/unemployment-in-the-u-s-is-falling-so-why-isn-t-pay-rising

Fitzgerald, T. J., & Nicolini, J. P. (2013). Is there a stable Phillips Curve after all?. Economic Policy Paper, 13(6)

Freeman, R. B., & Hilbrich, K. (2013). Do labor unions have a future in the United States? Retrieved from https://dash.harvard.edu/bitstream/handle/1/10488702/15855239.pdf?sequence=2

Hoover, K. (2017). Phillip’s Curve. The Concise Enclyopedia Of Economics, (2). Retrieved from http://www.econlib.org/library/Enc/PhillipsCurve.html

Mishler, P. C. (2006). Trade Unions in the United States and the Crisis in Values: Towards a New Labor Movement. Notre Dame JL Ethics & Pub. Pol’y, 20, 861

Wiczer, D., & Eubanks, J. (2014). Are Wages and the Unemployment Rate Correlated. Stlouisfed.org. Retrieved from https://www.stlouisfed.org/On-The-Economy/2014/December/Are-Wages-and-the-Unemployment-Rate-Correlated