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With Minnesota unemployment so low, why aren’t wages going up more?

elementary teacher
MinnPost file photo by Bill Kelley
Workers in medium-pay industries, like education and health services, and in lower-paying industries, like leisure and hospitality, have seen their paychecks rise only modestly relative to inflation.

Minnesotans should be getting a bigger raise.

At least that’s what lots of economists expect when unemployment is as low as it is — under 3 percent.

With few people out of work and more jobs open than workers to fill them, employers are calling labor shortage. They’re posting help-wanted signs and warning if they can’t find enough workers soon, Minnesota’s economy will slow down.

But not everyone agrees that the labor shortage is quite so bad.

“I don’t see a widespread labor shortage, I see businesses not wanting to raise wages across all sectors,” Neel Kashkari, the president and CEO of the Federal Reserve Bank of Minneapolis, told the Minneapolis/St. Paul Business Journal recently. “I’ll believe there is a labor shortage when I see wages increase and companies still have trouble finding workers. Until then it’s just talk.”

Low, low unemployment

The labor market should be governed by the rules of supply and demand. In simple terms, when the supply of something — like labor — becomes scarce, we should see its price — wages — increase.

By traditional measures, labor is becoming more scarce. The number of people looking for jobs is going down. Minnesota has been under 4 percent unemployment since autumn, 2014. That’s less than half the 8 percent unemployment rate at the height of the Great Recession.

Minnesota average annual unemployment, 1976-2018
Source: Federal Reserve Economic Data

When the supply of labor goes down, economists expect to see employers start to do things to entice people to work for them — like raising wages. If one employer in a sector raises wages, other employers in that sector should raise wages in order to compete. Soon, wages on the aggregate would be expected to rise.

The last time unemployment was under 4 percent in the second half of the ’90s, workers saw a fat paycheck increase. Between 1995 and 2000, workers saw an average $6,367 bump in pay, according to Federal Reserve data analyzed by DEED (all wage data in this story are in 2018 dollars, adjusted using the Consumer Price Index).

But the dream of the ’90s is no longer alive. Between 2012 and 2017, the same length of time, Minnesotans only saw pay increases, on average, of $3,596.

Minnesota average annual wage and salary, 1969-2017
Wages adjusted to 2018 dollars using the Consumer Price Index.
Source: Federal Reserve economic data, compiled by Minnesota Department of Employment and Economic Development

Stagnant wages aren’t spread out evenly across economic sectors: Jobs where workers were already earning bigger paychecks, like financial activities, saw bigger gains, while workers in medium-pay industries, like education and health services, and in lower-paying industries, like leisure and hospitality, have seen their paychecks rise only modestly relative to inflation.

Average weekly wages by Minnesota industry, 2000-2017
Wages adjusted to 2018 dollars using the Consumer Price Index.
Source: Quarterly Census of Employment and Wages, Minnesota Department of Employment and Economic Development

If unemployment is so low, why aren’t employers offering higher wages to attract workers?

Some hypotheses

One possibility, says Mark Wright, research director at the Federal Reserve Bank of Minneapolis, is that the labor market isn’t that tight after all — maybe our measures of labor market tightness aren’t very good.

One sign that this could be the case is we’re seeing people who previously reported not working because they were disabled going back to work.

“That’s a very welcome trend (and it’s) people we maybe thought were never going to work again,” he said. That may mean there’s more labor supply out there than the usual measures, like unemployment rate, indicate.

A second possibility is that firms are using things like benefits and workplace culture to attract workers — not higher wages.

“It’s purely anecdotal, but we have heard stories about firms offering more flexible working conditions — more paid time off and so on — as a way of attracting employees. It’s possible (the labor market is) tight, it’s just not showing up in wages, it’s showing up in other benefits,” Wright said.

A third possible explanation begins with the observation that profits have been large while wage payments have been low relative to the size of the economy. A lot of people point to that as evidence of monopsony in the market. Monopsony is a structure in which one buyer controls the market, holding prices down.

“In certain industries, we have seen a lot of mergers,” Wright said. For example, in lots of cities, there are fewer separately run hospitals, as more and more are run by the same networks.

When workers don’t have a lot of options for jumping ship to another company, it’s easier for employers to keep wages down.

“So the idea being that it’s possible that that’s holding wages down, even though things (in the labor market) might be getting tight,” Wright said.

Another example where this could be the case is with retail giants like Amazon, which has reached its preeminence in many markets by offering the lowest prices on goods, forcing other sellers to compete with it or lose business.

For firms that supply to Amazon, “anecdotally, one of the reasons they’re not raising wages is they can’t pass it on to Amazon,” Wright said.

It’s also possible that average wages are declining, in part, because baby boomers are retiring, taking their big paychecks with them, said Dave Senf, a labor market analyst at DEED.

“Some people say that’s a big factor; some people say that’s not a factor,” he said.

The explanations given above aren’t mutually exclusive, either: Some or all could be in play keeping wages down.

Supply and demand

Puzzlingly slow wage growth isn’t unique to Minnesota; it’s something bedeviling economists nationally, too.

“The housing market is really tight — there’s fewer listings than there used to be. What do we see happening? People are making offers above the asking price and housing prices are going up,” said Elizabeth Davis, a professor at the University of Minnesota who specializes in labor economics.

“People expect that kind of response in the housing market. We expect that kind of response in the labor market, but employers — they’re going to try not to raise wages if they don’t have to, particularly if they’re concerned about having to pass those rising wages into rising prices, and [may not] think consumers will be willing to pay those higher prices.”

Especially if their customers aren’t getting a raise.

Comments (36)

  1. Submitted by Frank Phelan on 02/05/2019 - 11:24 am.

    If employers were paying more in benefits, that would be reflected in the Employment Cost Index. In fact the ECI shows wage/benefit costs to be just as stagnant as wages alone.

    The author does a good job of using constant 2018 dollars, and making note of that.

    Many articles mention monthly wage gains, and point them as a sign of increased compensation. When inflation is factored in, those gains largely evaporate, resulting in year over year increases of less than one percent, far lower than GDP growth.

    Not mentioned is the Don Trump tax giveaway, which has done nothing. Well, it’s done nothing to put permanent wage gains in workers’ pockets. But it is doing what it was designed to do, blow up the deficit by putting $$$ in the pockets of billionaires.

    • Submitted by Bob Barnes on 02/05/2019 - 11:49 am.

      Tax cuts have nothing to do with wages. The tax cuts are letting average people keep more of what they earn. Contrary to popular leftwing belief, the lower and middle classes made out pretty well in the tax cuts.

      • Submitted by Dan Landherr on 02/05/2019 - 12:33 pm.

        We didn’t get tax cuts, we got a loan. Deficit spending will have to be paid for at some point in the future. The lower tax rate you got now will have to be made up in the future with interest.

        • Submitted by Bob Barnes on 02/05/2019 - 04:53 pm.

          We still got a tax cut. The spending is a separate issue. Tax cuts let each of us keep more of what we earn. No amount of taxation could eliminate the deficit. All raising taxes would do is slow down the economy.

          Where are the spending reduction bills in the House now that Democrats control it? There are none. they are pushing even more spending. When you’re broke, the first thing you do is stop spending money you don’t have.

      • Submitted by Frank Phelan on 02/05/2019 - 01:25 pm.

        The tax giveaway did virtually nothing for wage earners.

        But we were told that when corporations got huge tax giveaways, they’d just raise everyone’s wages accordingly. That and a big guy in a red suit would come down my chimney with presents.

      • Submitted by Jackson Cage on 02/07/2019 - 01:07 pm.

        Another factor not acknowledged by Trumpers is the changes in tax withholding. Paychecks aren’t bigger because of the tax cut, they’re bigger simply because employers are withholding less. A large segment of the middle class is now finding out that those past tax refunds have suddenly shrunk or turned into tax underpayment.

      • Submitted by James Miller on 02/08/2019 - 10:08 am.

        Until they expire in 2025. And again Bob, have you seen wage growth (I haven’t).

    • Submitted by B. Dahl on 02/05/2019 - 12:02 pm.

      Just a quick glance at the ECI December 17-December 18 shows wages and benefits increased approximately 3 percent for the year for private employees for all groups.

      • Submitted by Frank Phelan on 02/05/2019 - 01:29 pm.

        The ECI is not inflation adjusted. Given an ECI of 3% minus the CPI of nearly 2%, wage/benefit growth was stagnant for 2018.

  2. Submitted by Paul Udstrand on 02/05/2019 - 11:34 am.

    “Normal” economic assumptions aren’t really “normal”, they’re just neoliberal trickle down assumptions. Obviously these assumptions are wrong. There ARE economists who understand this, and this is an elementary observation given the history of labor and wages in Capitalist economies. Employers don’t pay more, unless someone makes them pay more in one way or another.

    • Submitted by Bob Barnes on 02/05/2019 - 11:56 am.

      The market would normally dictate wages via supply and demand. Govt regulations, foreign labor and other factors will skew that. I think this article shows that the official unemployment numbers aren’t as accurate as they claim.

      • Submitted by John Evans on 02/05/2019 - 02:14 pm.

        Agreed. This was alluded to in the article.

      • Submitted by Paul Udstrand on 02/05/2019 - 04:34 pm.

        This Market you describe has never existed. Wages have never increased via supply and demand. Supply and demand only dictates prices in a very limited number of scenarios because reality if always far more complex than simplistic economics.

  3. Submitted by Joel Stegner on 02/05/2019 - 11:52 am.

    Simple question. Simple answer. Those who make the decisions regarding wages are executives. If they keep salary and benefit costs down, they get paid more and their stocking holdings and options increase sharply in value. They don’t always stop at the edge of legality, but continue to underpay women for the same work, age discrimination against older workers and break the law to keep unions out.

    Executives want to maximize their incomes, and doing it at the expense of their hard working employees is a tried and true method. On the other hand, they have a lot of control over their own compensation. Even if their poor decisions hurt their business, they are paid generously to leave.

    Good example. Last Target CEO who left with over $50 million despite a complete failure with the Canada expansion and a major cyber attack not properly addressed.

    Don’t look for the business media to ever focus on individual executives making these decisions that hurt the ability of tgeolir workers to live middle class lifestyles. Taking home millions in compensation, they may get paid 200 times as much as their low wage employees, who suffer from forced overtime, wage theft and in some cases the total lack of sick leave,

    Obviously all executives do not operate like this, but even our businessman President has done this to make the big bucks. It really boils down to a moral choice. Is not giving employees pay increases or asking them to do more for less to pile up more wealth showing what kind of person you are?

  4. Submitted by Dillon Donnelly on 02/05/2019 - 12:18 pm.

    Neel Kashkari, a banker, who has done nothing on Too Big To Fail, goes to our more rural employers and says they’re whiners who can afford to make less. I’m not interested in taking lectures from him.

    Pay more is a stupid form of economic analysis.

    Plus, we have 144k vacant jobs, up from 97k just two years ago with an abundance of high-paying technical jobs available.

    Wage improvement directly relates to our ability to facilitate upward career mobility.

  5. Submitted by Jim Marshal on 02/05/2019 - 12:30 pm.

    “In certain industries, we have seen a lot of mergers,” Wright said. For example, in lots of cities, there are fewer separately run hospitals, as more and more are run by the same networks. When workers don’t have a lot of options for jumping ship to another company, it’s easier for employers to keep wages down.”………..I think there’s a lot of truth to that. Anti-trust law has been dormant for nearly 40 years. It would stand to reason that decades of mergers occuring in high paying industries is going to depress wages.

  6. Submitted by Chris Vogtman on 02/05/2019 - 12:31 pm.

    It’s a bit of a miss to not address Boomers and the impact they have on re-entering the workforce due to unplanned higher medical costs and other inflationary impacts. According the to a 2015 economic study Boomers will make up approximately 17% of Minnesota’s population by 2020. A revisit of the study might be helpful in truly understanding how is entering or exiting the workforce.

  7. Submitted by Paul Brandon on 02/05/2019 - 02:36 pm.

    A fourth possibility:
    a structural change in the economy.
    Manufacturing is the traditional source of of large numbers of middle income jobs for workers who don’t have specialized training.
    Manufacturing jobs have been replaced by automation and outsourcing (foreign labor). What’s left are lower paying service jobs: burger flipping and home care, for example.
    So average wages are going down not because companies are paying less for the same jobs, but because jobs are changing.’

  8. Submitted by Paul Udstrand on 02/05/2019 - 04:37 pm.

    Collapsed union participation, low minimum wages, and weak labor laws have produced this trend. It’s not a new trend, wages have been suppressed for decades.

    • Submitted by Bob Barnes on 02/05/2019 - 05:05 pm.

      Businesses can’t afford to unionize…see GM who is once again bankrupt due to unfounded union pensions. Unions aren’t in the best interest of employees either in most cases.

      Minimum wages shouldn’t exist. They are a price control.

      The US has the most strict labor laws of anyone. You might want to support some tariffs to try and force others to meet our standards instead. But you’ll just denounce Trump over it while you keep buying cheap Chinese goods made by slave labor.

      A few big factors keeping wages down for decades: deficit spending/unbacked credit emission, massive illegal immigration, failure to enforce anti trust laws, a federal reserve artificially pushing interest rates ever lower for 3+ decades… too many govt regulations (like Dodd Frank) ….

  9. Submitted by joe smith on 02/06/2019 - 05:08 am.

    Wages went up at over 3% last quarter. Best wage growth in years. Manufacturing jobs have been coming back, 500k added, even though Globalists insisted they couldn’t be brought back. Average USA salary for electricians is 60k, bring back the trades to High School.

    • Submitted by Bob Barnes on 02/06/2019 - 08:47 am.

      Senior year of high school should have an option of doing trades. It would help kids get a job right out of school that pays well and they wouldn’t need to pile up any debt. I won’t get into all the other high school education issues.

    • Submitted by Frank Phelan on 02/06/2019 - 09:36 am.

      Real wage growth was not 3%. Don’t conflate nominal gains with real (inflation adjusted) gains.

  10. Submitted by Hiram Foster on 02/06/2019 - 06:04 am.

    The reason why wages are low is that working people have little bargaining power.

  11. Submitted by Paul Udstrand on 02/06/2019 - 09:32 am.

    Mr. Barnes says:

    “The market would normally dictate wages via supply and demand. Govt regulations, foreign labor and other factors will skew that. I think this article shows that the official unemployment numbers aren’t as accurate as they claim.”

    See, this is ALWAYS the thing, basically it’s a recognition that if we didn’t live a REAL world supply and demand would dictate prices. This is what I mean when I say the “market” neoliberals and conservatives reference all the time doesn’t and never really has existed. Anyone anywhere who has actually tried to create “markets” like this ends up creating dictatorial regimes. For decades observers have pointed out that the strongest adopters of Friedman’s “market” ideology tended to be right wing dictators. Everywhere else we can simply document the fact that the more any economy is organised around “free” market neoliberal principles, the greater is wealth disparity, poverty, and low wages.

    The item’s on Mr. Barnes’s list change somewhat over the decades, but the fact remains that simplistic supply and demand theories are basically magical thinking. S&D might work in the ideal world of free market and neoliberal fantasy, but alas… we’re stuck in a real world.

    The only factor that has ever raised wages in any significant way has been collective bargaining. Any other attempt to explain why higher wages haven’t materialized is simply not a serious attempt to answer the question.

    • Submitted by Dennis Wagner on 02/11/2019 - 12:31 pm.

      To a couple of your points: The “Free Market” Folks love to cite Adam Smith “Wealth of Nations” as the basis for our economy, However, they chose to ignore any discussion about “social” or moral considerations, or dispense it as anti free market market rhetoric. Adam Smith did however publish other works, such as “The Theory of Moral Sentiment”, a unique passage: “Justice. For society to survive, there must be rules to present its individual members harming each other. As Smith comments, it is possible for a society of robbers and murderers to exist – but only insofar as they abstain from robbing and murdering each other. These are the rules we call justice.” The point is clear even a free market must have rules, and we are responsible to out neighbors survival as well as our own. It is also noteworthy that this book was published in 1759, 17 years before Wealth of Nations! Suspect Mr. Smiths writings indicate ignoring facts and rationale is the road to ignorance, not enlightenment.

  12. Submitted by Paul Udstrand on 02/07/2019 - 10:02 am.

    By the way, I think this is at least the 3rd Minnpost attempt to describe or explain the failure of wage increases given the “recovery” by asking why “expectations” and “predictions” of rising wages aren’t manifesting. At some point intelligent people begin to realize that when predictions and expectation persistently fail, the problem is the expectations and predictions. Repeatedly bending over backwards to try to salvage a failed model isn’t… productive shall we say.

  13. Submitted by Paul Udstrand on 02/10/2019 - 10:22 am.

    By the way, there are a few technical errors within this article’s analysis. For one thing, you would want to look at median wages rather than average wages if whenever you’re evaluating income across a populations. Second, I’m not sure why this author and her sources pretend that job availability is some kind of mystery; it’s called “Job Vacancy” and DEED keeps track of it, you see a chart here:

    If you look at that chart you’ll see that vacancy’s (i.e. available jobs) have been going up consistently since 2009 while unemployment has been dropping over the same period. So no, a tight job market can’t explain the stagnant wages. There’s no correlation between vacancy’s and wages because the trickle-down assumptions behind simplistic supply and demand predictions are fatuous.

  14. Submitted by Joe Musich on 02/12/2019 - 07:59 pm.

    I have to stand with those saying free markets have never exited. It just as much a myth as true socialism. Smith wrote in an era of irrationality. The western nations were still at each other’s throats about the return of you know whom. Smith was speaking to rationality. The great take away was free markets a handy little catch phrase. I am pleased to see Mr Wagner bring the entire truth of Smith to the table. But I suspect some will continue to believe what they wish as to the big picture. I suspect that Smith would have not supported this gop tax hoax. Nor the wry evident wage stagnation we see today. Smith argued for efficiency. It was one of his arguments against slavery. We can extrapolate from the argument he also likey would have support our local fed chief who has consistently pushed for out right wage increases. Doing so would make the entire system more efficient. You know make sure people make enough money to buy the products they make. Here is a link to an Adam Smith overview

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