January 26, 2015
CEPR’s Dean Baker recently took Neil Irwin to task for claiming that wages are going to rise soon. Irwin argued that the growing number of job openings is a significant plus for American workers. According to Irwin, if firms are looking to hire, they may begin raising wages in order to fill current vacancies. Matthew Yglesias of Vox made the same point here.
There is some logic to this point. A greater number of job openings means that more employers are looking to hire. And if employers are competing to hire workers, they will have to bid up wages to attract workers to their firms. So other things equal, a higher number of vacancies should benefit workers by pushing up wages.
But the problem is that “other things” are not equal in today’s economy. In particular, we have a large number of unemployed Americans competing for those vacancies.
If more job openings force employers to compete for workers and bid wages up, unemployment has the opposite effect: it forces prospective workers to compete for jobs and thus pushes wages down. Think of it this way: unemployed workers are desperate for jobs and will work at even very low wages, because any wage is an improvement over unemployment. When unemployment is high, employers need not bid up wages to attract workers to their firms, since the unemployed are desperate to work anyways.
So if you want to see who has greater leverage in setting wages, you should look at both competition amongst employers and competition amongst workers. A good way of taking both sides into account is by looking at the ratio of unemployed workers to job openings.
In December of 2007, the first month of the recession, there were 1.77 unemployed workers for every one job opening; the ratio peaked at 6.80 in July 2009. Looking at December 2014’s ratio of 1.82, you might think that wage growth was just around the corner. But as Dean notes, wage growth was pretty weak even before the 2007-2009 recession; the last time we saw substantial wage growth in this country was in the late 90’s and early 2000’s. Unfortunately, the Bureau of Labor Statistics’ data on job openings only goes back to December 2000, but even in December 2000 and January 2001, the ratio of unemployed workers to job openings was 1.14. So last month, there were nearly 60 percent more unemployed Americans competing for each vacancy than we saw fourteen years ago, when wages actually were rising. I don’t see how you look at those statistics and conclude that employers are on the verge of bidding up wages.
I don’t mean to say that the labor market isn’t recovering. It is. The drop in the ratio of unemployed workers to job openings from 6.80 to 1.82 is significant. And this improvement holds up even if you employ more comprehensive measures of joblessness. For example, if you include Americans who aren’t part of the labor force but would like to work, we currently see a ratio of 3.14 would-be workers for every one job opening; this represents a big drop from July 2009, when the ratio peaked at 9.60. But again, December 2014’s ratio was about 60 percent higher than January 2001’s ratio of 1.98. Even when I change my methodology, I get the same basic results. I don’t see evidence that wages are about to grow significantly in either measure.
Undoubtedly many journalists would like to see some better news on wage growth. It must be boring to report month after month that wages aren’t rising. But we shouldn’t be giving people false hope, and we shouldn’t assume that wages will begin growing significantly on their own. When you claim that wage stagnation isn’t a problem, you stop looking for solutions, and the problem only gets worse.
