Economic Brief

February 2015, No. 15-02

How Should the Fed Interpret Slow Wage Growth?

Marianna Kudlyak, Thomas A. Lubik and Karl Rhodes

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During the current recovery, policymakers have debated whether slow wage growth indicates labor market "slack" that is not adequately reflected in the unemployment rate alone. The relationship—or lack thereof—between the unemployment rate and wage growth has challenged macroeconomists for decades. Empirical studies using micro data find that individual wages are procyclical, but attempting to use aggregate measures of wage growth to determine the level of "slack" in the labor market would be highly difficult and potentially misleading.

Additional Resources

Daly, Mary C., and Bart Hobijn, "Downward Nominal Wage Rigidities Bend the Phillips Curve," Federal Reserve Bank of San Francisco Working Paper 2013-08, January 2014.

Daly, Mary C., Bart Hobijn, and Theodore S. Wiles, "Dissecting Aggregate Real Wage Fluctuations: Individual Wage Growth and the Composition Effect," Federal Reserve Bank of San Francisco Working Paper 2011-23, May 16, 2012.

Erceg, Christopher J., Dale W. Henderson, and Andrew T. Levin, "Optimal Monetary Policy with Staggered Wage and Price Contracts," Journal of Monetary Economics, October 2000, vol. 46, no. 2, pp. 281-313. (A working paper version is available online.)

Krause, Michael U., and Thomas A. Lubik, "The (Ir)Relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Journal of Monetary Economics, April 2007, vol. 54, no. 3, pp. 706-727. (A previous version is available online.)

Kudlyak, Marianna, "Are Wages Rigid Over the Business Cycle?" Federal Reserve Bank of Richmond Economic Quarterly, Second Quarter 2010, vol. 96, no. 2, pp. 179-199.

Kudlyak, Marianna, "The Cyclicality of the User Cost of Labor," Journal of Monetary Economics, November 2014, vol. 68, pp. 53-67. (A working paper version is available online.)

Mester, Loretta J., and Elif Sen, "Has Job Quality Been 'Job One' in the Economic Recovery?" Federal Reserve Bank of Philadelphia Research Rap, Special Report, August 14, 2013.

Phillips, A.W., "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, New Series, November 1958, vol. 25, no. 100, pp. 283-299.

Ritter, Joseph A., "Opening Pandora’s Box: The Measurement of Average Wages," Federal Reserve Bank of St. Louis Review, March/April 1996.

Yellen, Janet L., "Labor Market Dynamics and Monetary Policy," Remarks at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming, August 22, 2014.