Here's a simple theory that explains America's lack of wage growth

We’ve been seeing signs that wage growth is on the horizon for quite some time.

For example, small businesses have reported planning to increase compensation and have cited “labour quality” as one of their biggest concerns. Moreover, the ratio of unemployed job seekers to job openings is at 2006 levels, indicating that the labour market is really tight.

However, we have yet to actually see any serious wage growth.

Even the latest jobs report, which showed that overall the US economy is on fire, showed disappointing data for wages.

In a recent note, Deutsche Bank’s Torsten Slok suggested one interesting reason why this could be the case: “Starting in 2014, more people outside the labour force suddenly started finding jobs.

Theoretically speaking, economic data suggests that wages tend to respond to conditions in the labour market. In a tighter labour market, workers have more employment options, which means that if firms want to keep quality workers, they’re going to have to offer more competitive wages.

But what Slok seems to be suggesting here is that firms are looking at a greater pool of quality workers, and thus they might have the upper hand and can keep wages lower.

Interestingly, there’s also a bright side to this: after all, more people outside of the labour force finding jobs is good news — especially since economists previously noted that the share of the unemployed leaving the labour force rose from 2009 to 2014.

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