Why Wage Growth Is So High

One of the economy’s biggest mysteries is this: The labor market is the strongest it has been in a decade, yet wages are rising barely faster than inflation.

For some reason, the booming job market and ultralow unemployment rate, which fell to 4.4 percent in April, haven’t led employers to raise pay in a meaningful way. That flies in the face of a basic assumption of how the economy works: A tight labor market is expected to lead to pay increases that in turn fuel broader inflation.

But the mystery of the missing pay raises may have a surprisingly simple solution, and one that sheds light on the larger economic challenges of our age.

Consider a simple model for how much the average worker’s pay ought to be rising: You could simply add together the productivity growth rate — how rapidly the output generated by each hour of labor is increasing — and the inflation rate, which tells us how quickly prices are rising.