View as a webpage

Anemic real wage growth is restraining state economic activity declares MassBenchmarks Editorial Board

Low productivity growth, rising healthcare costs, and demographics put pressure on Massachusetts households and state tax receipts

The Massachusetts economy has appeared to slow in recent months even as the state continues to add jobs at a solid pace. The recent rise in the state unemployment rate has been driven by the return of inactive workers to the labor force rather than growing joblessness. These developments continue to raise concerns about the extent to which the performance of the state economy is being restrained by emerging and long-standing shortages in key occupational niches and an inadequate supply of skilled and unskilled labor in those areas of the Bay State where labor demand continues to be strong. Yet wage growth remains sluggish and is not rising as we would expect given the current economic environment.

Much of our Board meeting was spent discussing these issues and the puzzling patterns that characterize recent regional labor market trends. That the state's labor market is tightening is beyond debate at this point. Since the end of the "Great Recession" in late 2009, the state unemployment rate has fallen from a high of 10 percent to its current rate near 4 percent. Over this period, total employment has grown by 385,400, the working age population has increased by 316,300, and the labor force has grown by 239,000. In other words, employment in Massachusetts has grown considerably faster than both the working age population and the labor force. Employers report that it is increasingly hard to fill jobs. Job vacancies now significantly exceed new hiring. And yet, wage growth in the state has been near zero when adjusted for inflation. This is a puzzle that has significant economic and fiscal implications for the Commonwealth that one Board member termed, "wage-less job growth."

There are some broad macroeconomic factors that have clearly contributed to anemic wage growth. An important culprit is slow growth in labor productivity. Over the long run, real pay increases cannot exceed the growth in productivity. And while there is considerable debate about the causes of slow productivity growth, there is little dispute about its negative impact on wage growth. Another likely factor is the decline of labor unions, and the more recent rise of the "gig" economy, both of which have diminished bargaining power for workers.

There is also some reason to believe that the declining pricing power of firms in some sectors of the economy has hampered their ability to raise wages. And rising health care costs are consuming resources employers might have used to raise employee wages in settings where these benefits are provided. Additionally, the aging of the workforce and the rising number of retirements have allowed some employers to replace their more experienced and more highly paid staff with younger and presumably lower-paid new staff members.

In any case, in the absence of productivity improvements, higher prices for goods and services is the remaining route to higher real wage levels. If this possibility is foreclosed due to the intensity of domestic or global competition, and/or insufficiently robust aggregate demand, we can expect to continue to observe stagnant wage growth, increasing financial challenges for Massachusetts households, disappointing state tax receipts, and a slowing state economy.

For more information, please contact:
Robert Nakosteen Executive Editor, MassBenchmarks Professor of Economics, UMass Amherst 413-545-5687 nakosteen@isenberg.umass.edu
Michael Goodman Co-Editor, MassBenchmarks Executive Director, the Public Policy Center (PPC) Professor of Public Policy, UMass Dartmouth (617) 823-2770 mgoodman@umassd.edu		Katharine Bradbury Co-Editor, MassBenchmarks Senior Economist and Advisor Federal Reserve Bank of Boston (617) 973-3192 Katharine.Bradbury@bos.frb.org
Mark Melnik Senior Managing Editor, MassBenchmarks Director, Economic and Public Policy Research University of Massachusetts Donahue Institute 617-287-3988 mmelnik@donahue.umassp.edu		Alan Clayton-Matthews Senior Contributing Editor, MassBenchmarks Associate Professor of Public Policy & Economics Northeastern University (617) 512-6224 a.clayton-matthews@neu.edu

MassBenchmarks Editorial Board

Frederick Breimyer, Federal Deposit Insurance Corporation (retired)
Lynn Browne, Brandeis University; Federal Reserve Bank of Boston (retired)
Mary Burke, Federal Reserve Bank of Boston
Peter Doeringer, Boston University
Robert Forrant, University of Massachusetts Lowell
Yolanda Kodrzycki, Federal Reserve Bank of Boston (retired)
Frank Levy, Massachusetts Institute of Technology
Alicia Sasser Modestino, Northeastern University
Christopher Probyn, State Street Bank
James Stock, Harvard University
David Terkla, University of Massachusetts Boston
Paul Willen, Federal Reserve Bank of Boston

For timely and comprehensive analysis of the Massachusetts economy, please visit MassBenchmarks at www.massbenchmarks.org.