Looking for a rise

THE last time unemployment in Wisconsin was as low as today’s 4.3% was in April 2001. George W. Bush had been president for a mere three months; Gladiator had just cleaned up at the Oscars. Usually, economists have to look back just one recession to gauge the strength of a labour-market recovery; in Wisconsin, they must go back two. With their talents in such demand, today’s Wisconsinites might have expected bumper pay rises in 2015. Instead, they have been disappointed. Hourly wages rose by just 1.1% in the past year—and are lower than they were 18 months ago.

The Badger State is not alone. The same curious combination of booming labour market and meagre pay rises has characterised the economy as a whole for most of 2015. At 5%, nationwide unemployment is more or less as low as the Federal Reserve thinks it can go before the economy overheats. Even the broader measure of underemployment, which include workers who are part-time but want a full-time job, is at its lowest in seven years. Despite this, wage growth has been lacklustre. It was a sign of the times when, on November 6th, pundits celebrated the news that hourly pay grew by 2.5% in the year to October. Bumper by today’s standard, that pace remains well below the 3.8% achieved in mid-2007, before the financial crisis hit.

This has cast doubt on the conventional wisdom that a tight labour market leads firms to bid up wages, resulting in higher inflation. Lael Brainard, a Fed governor, recently declared that, unlike some of her colleagues, she views the labour market as an insufficient bellwether for price rises.

The link between unemployment and wage growth—the so-called “wage Phillips curve”—has flattened in recent years, for several reasons. One is low participation in the labour market. At just under 81%, the proportion of 25- to-54-year-olds in the labour force is lower than at any time since 1984. For men, the labour-force participation rate is lower than in supposedly sclerotic France or social-democratic Sweden.

Many of these potential workers gave up looking for a job during the long hangover from the financial crisis. As a result, the fraction of 25-to-54-year-olds with jobs has recovered only about halfway to its pre-recession peak. Inactive folk act as a brake on wage growth if better prospects can tempt them back into the labour force.

The same is true of migrants. Economists have long suspected that labour and capital flowing across borders may dampen the effect of employment on wages and prices. There is some recent evidence for this on a state level. Wage growth and unemployment appear related only in states where, overall, few migrants flow in or out (see chart). Workers in such states, which include Ohio, Michigan, and Mississippi, may have more bargaining power in booms and less in downturns. They also have lower overall wage gains on average.

The pickup in wage growth that appeared in October’s data, if sustained, will not be enough to keep living standards rising. In the long run, that requires rises in labour productivity, the amount produced by each worker. In the aftermath of the recession, labour productivity growth fell in tandem with wage growth. In the past five years it has grown by an average of just 0.5% a year, compared with 1.9% from 2005 to 2010, and 3.2% in the five years before that. Persistently weak productivity growth is depressing wage growth by about 0.3 percentage points, according to David Mericle of Goldman Sachs, a bank.

Falling fuel prices and an appreciating dollar have recently masked this shortfall by filling workers’ wallets. With zero inflation, employees will cheer a 2.5% pay rise. Tumbling petrol prices may have kept a lid on wage demands; Mr Mericle estimates that low inflation has knocked about 0.2 percentage points off wage growth.

As inflation does eventually return, though, wages must rise higher still. Unfortunately, the productivity slowdown may be permanent. In a recent paper, John Fernald and Bing Wang of the San Francisco Fed documented how it began before the crisis—as big gains from information technology during the 1990s and early 2000s dried up—and warn that a “relatively slow pace” is the best guess for the future.

Bridge and tunnel

This is not the stuff of stump speeches. Among the candidates for the Republican nomination, Donald Trump, Jeb Bush and Marco Rubio want to slash taxes to spur productivity-boosting private investment. All promise to cut American’s corporate tax rate, which at 35% is the highest in the OECD, a club of mostly-rich countries. Mr Rubio wants to encourage corporate investment further by allowing firms to deduct the full cost of investment from taxes in the year they are made.

A Republican president would inevitably pair these changes, though, with expensive income-tax cuts that would require a squeeze on public investment. That would sap productivity, especially given the deplorable state of American infrastructure. The burden of shoddy roads, airports and energy infrastructure will cost every household $3,100 a year, according to the American Society of Civil Engineers. Avoiding that should be a priority. On November 5th the Republican-controlled House of Representatives at last passed a highways bill, which should help, but left a gaping hole in the finances of the highway trust fund. Part of the bill was funded by a raid on the Fed’s reserves.

Hillary Clinton, the probable Democratic nominee, promises more funds for infrastructure and scientific research. Yet if income-tax cuts lead Republicans astray, Democrats are too keen on crude responses to wage stagnation, such as much higher minimum wages. On November 10th, Mrs Clinton tweeted a message of support for campaigners for a $15 minimum wage.

Recent data show wage growth straining at its shackles; sooner or later, it will escape them. But over the next year, pay will rise only in tandem with inflation. That will bring the productivity slowdown sharply into view for the next president.