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Severity of Financial Crisis to Blame for Slow Wage Growth

The labor market has taken significant steps in the quest to return to pre-recession employment levels. Still, concerns remain among many about the quality of jobs being created. Wages have increased over the past year but at only a 2.3 percent growth rate, they lag behind the growth rate that they should be experiencing at this point in the business cycle. A change may be in the air.

Wells Fargo Economics Group released a report asserting that the slow growth in hourly earnings stemmed not from the composition of the jobs being created but from the ripple effects of the severe economic downturn that gripped the nation from 2007 to 2009. Specifically, the report cites the possibility that employers who were reluctant to make wage cuts and lay off employees in the middle of the recession are now restraining wage growth as a way to make up for that decision.

Slack in the labor market has been an important key to keeping wages from growing at a more rapid rate. The glut of quality employees available to employers has weakened the bargaining power of employees, keeping wages lower than they should be. If Jim won’t do the job at a discounted rate, Ray, Susan, or Bob surely will.

There are signs of hope for employees, according to the report. Slack in the labor market has decreased significantly over the past year. The unemployment rate has dropped to 6.1 percent and quality employees are beginning to become scarcer in the marketplace, which in theory, will release a lot of pent up wage growth pressure.

“Growth in average hourly earnings in the top quintile has already risen from 1.6 percent a year ago to about 3 percent at present,” the report said. “Looking forward, there likely will be more acceleration, not only for top wage earners but for workers in other wage quintiles as well. Wage pressures should be mounting as slack in the labor market has broadly declined, illustrated by the further decline in the unemployment rate.”

Wells Fargo predicts that wages will grow gradually over the next year but barring some unforeseen jump in growth, it is unlikely that the Fed will be compelled to raise interest rates until sometime in the middle of 2015.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.

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