Polarization may help explain U.S. soft wages

In U.S., polarization may be breaking the usual links between standard measures of labor market capacity and inflation. A growing puzzle for markets and policymakers has been the apparent decline of the non-accelerating inflationary rate of unemployment (NAIRU) and, hence, very stubbornly slow wage growth. 

Labor market polarization, by lengthening the time required to repair jobless recoveries, as well as dampening inflation upside potential by keeping wages soft, may well mean the NAIRU is falling even lower, requiring that much more improvement in the labor market to ultimately get wages and price pressures back to normal. 

Average hourly earnings have consistently been stuck around 2%, which could owe in part to the hollowing out of better paying middle-skill routine occupations, particularly since the downtown. Of course, the employment cost index has recently done even worse than AHE, even though the ECI is supposed to control for changes in the occupational mix. Still, the ECI may not be able to quite effectively control for such substantial secular changes in the labor market, argues BoFAML.

Moreover, the critical element of such jobs, their routine nature, also makes them uniquely vulnerable to both automation and international competition. Both of these features reduce employment security in these occupations in a way that non-routine jobs are not impacted. Consequently, fears continue to grow around whether or not robots will take over much of the labor market, and free trade measures now undergo even more worker anxiety as well, added BoFAML.