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Is This the Real Reason Wages Aren’t Growing Faster?

Topics: Data & Research
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Wages have grown for nine consecutive quarters, but most Americans probably don’t feel richer than they did before the Great Recession. Why? Because real wages — the buying power of workers’ pay when inflation is taken into account — have declined 6.7 percent since 2006.

There are a lot of theories about why wages aren’t growing faster: among them, the decline of labor union membership and worker-friendly policies, and the rise of globalization and automation.

But a new study offers an additional explanation: a shortage of employers in the U.S. is skewing the job market in favor of companies, not workers.

The working paper, by José Azar of IESE Business School at the University of Navarra, Ioana Marinescu of the University of Pennsylvania and Marshall Steinbaum of the Roosevelt Institute, examines data from CareerBuilder, which publishes about a third of online job listings in the U.S. The researchers looked at over 20 different occupations in metro areas across the U.S. from 2010 to 2013, and calculated the labor market concentration in each area using the Herfindahl-Hirschman Index (HHI), which the U.S. Department of Justice uses to evaluate mergers.

At Slate, Jordan Weissmann explains:

What they found was a bit startling. The Department of Justice and Federal Trade Commission consider a market with an HHI score of 2,500 or more to be highly concentrated—if a merger between two wireless companies left that little competition for cell services, for instance, there’s a good chance the government’s lawyers would challenge it. In their paper, the authors find that America’s local labor markets had a whopping average HHI score of 3,157. Employers also tended to advertise lower pay in cities and towns where fewer businesses were posting jobs—suggesting that the lack of competition among companies was letting them suppress pay. According to one of their calculations, moving from the 25th percentile of labor market concentration to the 75th percentile would lower pay in a metro area by 17 percent.

As you might expect, lack of competition and thus wage depression was more pronounced in small towns than in big cities.

Weissmann notes, however, that this is an early study, and that an economist he spoke with thinks the findings may be overstated. But it’s certainly an area worthy of further investigation.

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Jen Hubley Luckwaldt
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