Explaining the Wage Growth Mystery

A wage “mystery” has puzzled economics commentators for several years: If unemployment is so low, why has wage growth not picked up? This article will argue that there is no puzzle when the right measures are used. The problem with how wages are measured is that the most commonly used measure is biased over the business cycle. The problem with how labor slack is measured is that the magnitude and depth of the Great Recession led many workers who could and would work again to exit the labor force entirely. As a result, many workers relevant to labor market slack were no longer being counted as unemployed, making the unemployment rate a poor gauge of labor market slack.