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- When not to fuss over wage growth
In his 1990s classic “Butterfly Economics”, the economist Paul Ormerod describes how inherently unpredictable complex systems can be in the short-term. For whole economies, this has big potential implications for employment, inflation, productivity and monetary policies. “The same values for variables which might be thought to cause inflation can be associated in different historical contexts with quite different values for the rate of inflation.”[1]
Which helps explain why that U.S. job markets have regularly defied expectations since the start of the Covid 19 pandemic. Our Chart of the Week updates one particularly interesting phenomena: how median hourly wages have been diverging depending on whether workers switched jobs or not. For this chart, job stayers are defined as people who are in the same occupation and industry as one year ago and who have had the same employer for the past three months. Job switchers are everyone else. As the chart shows, such switchers continue to enjoy significantly higher wage growth.
The post-pandemic benefits of switching jobs
* 3-month moving average in median wages, non-seasonally adjustedSources: Federal Reserve Bank of Atlanta, DWS Investment GmbH as of 3/8/24
To a non-economist, this might seem obvious. Why would anyone switch jobs, unless jobs markets are tight and prospects at other employers better? In the kind of model economies macro-economists tend to feel most at home, though, there is usually little scope for these types of behaviors. Theoretically, wages in a competitive labor market for both stayers and switchers should swiftly adjust, particularly if the cost of living is rising. After all, replacing experienced workers is costly for employers, especially for skilled workers who have received on the job training. Rational employers might be expected to do their utmost to keep such experienced job stayers on board.
Instead, the evidence is becoming increasingly clear that real wages have grown substantially faster at the bottom of the labor market since 2020, compared to gains among top earners.[2] As labor markets tightened, so has the willingness to switch, especially among young non-college workers who started out in lower-paying jobs.[3] One intriguing explanation is that locally, employers of such workers may have had significant market power – think of fast-food chains or jobs in warehouses. If so, part of the recent gains may reflect young non-college workers disproportionately moving from lower-paying, low productivity to higher-paying and potentially more-productive jobs. Because it reflects productivity gains, such wage growth need not be inflationary.
“This has promising implications for monetary policy. Such phenomena may help explain why unemployment did not need to rise as much as many feared, for inflation to come down. Or as one might put it in economic jargon, we may be seeing a re-flattening of the Phillips-Curve,” explains Christian Scherrmann, U.S. Economist at DWS, referring to the inverse relationship between the level of inflation and unemployment. For the Federal Reserve (Fed), the proof will ultimately be in the pudding – whether inflation continues to fall without unemployment rising substantially. In the meantime, the Fed might as well wait and see. Ormerod, for one, would hardly be surprised. An early pioneer in the application of machine learning techniques to macro-economic data analysis, he strongly cautioned policymakers against pretending to know more about the causal processes generating economic data than they actually do.
