Economists Seek Reasons for Unorthodox Behavior of Wages

By Uchitelle, Louis | THE JOURNAL RECORD, August 5, 1989 | Go to article overview
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Economists Seek Reasons for Unorthodox Behavior of Wages

Uchitelle, Louis, THE JOURNAL RECORD

Through the winter and spring, many economists expected wages to rise sharply.

This wage spiral would be the inevitable result of the nation's low unemployment rate: companies would be forced to bid for scarce workers, and wages would finally behave as they once did - rising briskly for millions of people.

But the big wage increases never materialized, and now the window of opportunity has passed. With the economy hanging on the edge of a recession, the demand for workers has begun to ease.

Companies are creating fewer new jobs than earlier in the year, a trend likely to show up again in the July employment figures, due out Friday. The civilian unemployment rate might even begin to rise from its June level of 5.2 percent, some forecasts contend.

``We just missed wage acceleration,'' said Roger Brinner, chief economist at Data Resources Inc. He argues that Labor Department data showed the beginnings of wage acceleration in this year's first quarter, an argument that others dispute.

Wages have indeed risen more rapidly this year than last, as Brinner notes. But when adjustments are made for inflation, both hourly wages and total hourly compensation (including company-paid health insurance premiums and other benefits) failed to budge.

The economic slowdown is temporary, of course. Eventually, the economy will grow again.

And then the old question will return: why did wages fail to rise, given an unemployment rate under 5.5 percent for 15 months? Could it happen again?

Not since the early 1970's has unemployment been so low for so long, and in those days wages did rise significantly.

``I was surprised by the fact that wages were more well behaved than people would have anticipated,'' said Robert Parry, president of the Federal Reserve Bank of San Francisco.

Parry and many other economists had believed that as labor shortages developed, wages would accelerate and so would the inflation rate, as companies raised prices to cover higher labor costs.

Now economists are scrambling for explanations of the unorthodox behavior of wages. Many factors are cited, ``but no one really understands why wage acceleration did not take place,'' said Orley C. Ashenfelter, a labor economist at Princeton University.

Some of the contributing factors are already well known, of course, among them the mass layoffs in the early 1980's, the erosion of union power, the frequency with which employers closed factories and switched production to low-wage countries and the great concern over job security.

In addition, some economists consider the low unemployment rate misleading.

Part-time employees and temporary workers, for example, count among the employed, helping to hold down the unemployment rate.

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Economists Seek Reasons for Unorthodox Behavior of Wages


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