As many of you know, making a clean getaway out of work and into vacation isn’t easy. Last-minute requests need to be addressed, ongoing efforts must be delegated to others and out-of-office messages have to be posted. (After which you will receive 25 e-mails asking if you can call in to a committee meeting from your holiday.) The process can be very stressful.

So when I sat down to dinner on the first night of my recent sojourn, I was looking forward to relaxing. The sun was setting, the beer was cold and I had my family around the table. Just as I felt my blood pressure beginning to descend, my eldest and her fiancé began detailing their wedding plans. Sponsorship levels and guest lists were up for discussion; these are hardly the subjects of light conversation. I had to order another beer to calm my nerves.

I think I will also need a pay raise to generate the capital needed to celebrate the occasion properly. But while U.S. employment conditions are their best in a decade, pay raises remain very modest. This puzzling outcome is complicating the economic outlook and the conduct of monetary policy. There are many theories that attempt to explain this trend, but there is no definitive sense of whether it will pass or persist.

Supply and demand theories suggest worker scarcity would increase the price paid for labor. This has certainly been the case during recent American expansions, when annual wage gains topped 4%. But this time around, both nominal and real hourly earnings growth has failed to match the peaks seen in past upturns.



To be fair, the unemployment rate does not fully capture the full extent of available human capital. Wages can be held down by pockets of workers not well accounted for by this metric. But a broader range of indicators (part-time employment, long-term unemployment, quit rates and job openings) indicate the U.S. job market is as strong as it was ten years ago. Labor force participation is still below its long-run trend, but the difference between the two is narrowing and research has found addiction and disability to be limiting prospects for many not actively looking for work. All of this suggests there isn’t much idle capacity left and that wages should be increasing more quickly.

Observers have offered a series of potential explanations for the apparent breakdown in the traditional relationship between the availability of labor and its cost.

a) Many people get a series of benefits through their employers, health insurance chief among them. When the value of these benefits rises, workers might be content with more modest increases in their salaries. During the first six years of the current expansion, the value of employee benefits was rising much faster than wages were; this might have kept a lid on pay demands. Of late, however, the value of benefits has not been rising as quickly.

b) At the Federal Reserve’s 2014 Jackson Hole gathering, Janet Yellen hypothesized that there was “pent up wage deflation” left over from the 2008 recession. Since firms typically do not cut worker wages during slow times (preferring to cut workers, instead), they limit wage increases for a time during recovery periods until worker value and worker compensation come into closer alignment. This might have been the case during the initial phase of the current expansion, but it seems logical that this effect would dissipate over time.