Why You Haven’t Gotten A Raise
Even Though The Economy Is Red Hot
Economy Is Running Near Full Capacity
The unemployment rate in the U.S was 3.7% in September, the lowest it’s been since 1969. Normally, when the unemployment rate drops we see significant increases in the wages workers earn. This is because employers are competing amongst each other to hire the best people available in the labour market.
When the unemployment rate falls, that means there is a fewer number of employees left in the labour market. This forces firms to be more competitive to persuade the remaining workers in the labour market to choose their firm over its competition. Which means they will increase the amount of money they offer prospective employees. Similarly, when the labour market is tight it gives current employees better bargaining power to ask for a pay raise to prevent them from leaving for a competing firm that may be willing to offer them more money.
The unemployment rate is the lowest it’s been in 40 years, so wages should be going through the roof. Only they aren’t.
The theory that a low unemployment rate translates to higher wages assumes that the labour market is perfectly competitive. In a perfectly competitive labour market, there are many firms competing for workers and no firm…
