America's wage problem: why are we surprised that fewer people want to work?

• Author: Verleger, Philip K., Jr.

The Federal Reserve has taken great interest in the very slow growth of employment and labor force participation. It emerged first in an August 11 speech in Sweden by Fed Vice Chairman Stanley Fischer. Chair Janet Yellen then hammered the point home in her talk at the Kansas City Fed's annual Jackson Hole symposium. In case anyone missed the central bank's concern, the symposium title was "Re-Evaluating Labor Market Dynamics." The presentations comprehensively reviewed the literature and current thinking. However, one subject escaped attention: the growing monopsony power of employers--a monopsony being a market where the purchaser of goods and services can dictate terms since one buyer faces many sellers. The failure to recognize and address this structural change may restrain the nation's economic growth for a decade or more by limiting growth in per capita income and the number of individuals seeking employment.

In his remarks, Fischer noted that the diminishing labor supply was contributing to the United States' slow recovery. He commented that "the surprising weakness in labor participation reflects still poor cyclical conditions." Noting that some workers who have dropped out may be discouraged, he voiced the hope that "further strengthening of the economy will likely pull some of these workers back into the labor market."

In Jackson Hole, Yellen addressed the subject in far greater detail during her opening speech at the symposium. An economist who studied labor issues in the past, she provided a thorough, compact review of the slow growth in employment. She began by hypothesizing that the market had been "polarized," meaning the "relative number of middle-skill jobs" had dropped. Yellen suggested that the declining participation rate could also relate to baby boomers getting older, disability increasing, and people returning to school, among other reasons.

As she concluded her talk, Yellen focused on labor compensation. Noting the absence of any real wage increase, she suggested the recovery in labor markets may have been overstated. "And, since wage movements have historically been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate." This last remark has been interpreted to mean the Federal Reserve may further delay monetary tightening.

The continued focus on the rate of change in employment...