Just a very short post this morning to highlight an incredibly interesting chart that I put together. Below I have mapped out year-on-year changes in wages against the unemployment rate. The results are very interesting indeed.
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As we can see, in the period 1965-1981 (green circle) when unemployment went up wage-growth continued climbing regardless. However, in the period 1981-2013 (orange circle) whenever unemployment went up wage-growth slowed substantially. Indeed, in the second period we see a sort of “mirror-image†relationship.
This is not to say that after 1981 wages in the US became flexible — they do not fall when unemployment rises as particularly silly variants of mainstream theory claim — but there is a strong negative correlation between unemployment and wage growth.
The reason, of course, is obvious. Union density has fallen substantially since the early 1980s as can be seen from the graph below.
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Everyone and their cat know this, of course. But I thought that the first chart was very interesting indeed. It really shows the changes that have taken place in the US labour market since 1981 in a crystal clear manner. Again, wages still grow as unemployment rises. But their acceleration does slow substantially.
Finally, let’s look at real wages — that is, wages adjusted for inflation — and how they relate to unemployment. We can see this in the graph I’ve put together below.
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At first glance we see another “mirror-image†suggesting that there is a negative relationship between the two variables. This would seem to indicate that even in the period 1965-1981 wages fell when unemployment rose and vice versa. I would argue against this interpretation.
First of all, it is clear that until 1973 there was definitively no negative relationship between the two variables. Indeed, wages seemed to rise when unemployment rose — the opposite of what should theoretically happen in a flexible labour market.
