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  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
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  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
Upside of Inequality Oxford Unintended Consequences

AI Summary. Prolonged economic expansion after the Great Recession was necessary for wage gains to reach lower-income workers, as wages at the median and 20th percentile remained below pre-recession levels until labor markets tightened after 2014. Slower productivity growth throughout the recovery constrained living standards despite wage gains across the income distribution.

Michael Strain National Bureau of Economic Research
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Had 2009 expansion ended in 2014, real wages at median and 20th percentile would have been under 2007 level @MichaelStrain @nberpubs.

Can wage recovery require longer expansions than productivity growth permits?

Core argument: Real wages at the median and 20th percentile remained below 2007 levels through 2014, demonstrating that labor market slack from the Great Recession suppressed wage growth for lower-income workers until the expansion's later stages, when tightening labor markets drove cumulative real wage gains starting in 2012–2015.

The recovery from the Great Recession was marked by a slow and steady expansion, with significant labor market slack initially holding back wage growth, particularly for lower-income workers. Had the 2009 expansion ended in 2014, real wages at the median and 20th percentile would have been below 2007 levels. It took over 9 years for unemployment to fall to the CBO's natural rate, with the economy adding jobs for 113 consecutive months starting in October 2010. Real wage growth began to accumulate late in the expansion, with median wages rising from 2012 and bottom quintile wages from 2015. The length of the expansion was crucial in tightening labor markets, eventually leading to wage gains across the income distribution. Despite these gains, productivity growth remained notably slower compared to previous cycles, impacting overall living standards and wage growth.

Takeaways by Macro Roundup® AI

  1. Real wages at the median and 20th percentile remained below 2007 levels through 2014, demonstrating that labor market slack from the Great Recession suppressed wage growth for lower-income workers until the expansion's later stages, when tightening labor markets drove cumulative real wage gains starting in 2012–2015.
  2. The economy added jobs for 113 consecutive months beginning October 2010, taking over 9 years to reach the CBO's natural unemployment rate, which extended the expansion long enough to eventually tighten labor markets and generate wage growth across the income distribution that would have been absent in a shorter recovery.

new Strain that might be a useful citation at some point documents the slow recovery from the Great Recession. Slow and steady (eventually) won the race - their story is large labor slack held back wage growth, especially at the bottom of the distribution. Eventually, workers got real gains. Deflating with PCE, workers at bottom quintile saw real wage gains on average of 1% a year but all of that came late in the expansion. They find no evidence of overheating going into pandemic as inflation was check.

Good chart of real hourly wage growth by percentile seems to show a real pivot in 2014. Had the 2009 expansion ended in 2014, real wages at the median and 20th percentile would have fallen below their 2007 levels.

The Recovery From The Great Recession: A Long, Evolving Expansion: Extended Excerpt Image 1


In terms of wages and participation, “…In the previous 3 recessions, it took 5-6 years for the unemployment rate to fall to the CBO’s estimate of the natural rate of unemployment. Following the Great Recession, it took over 9 years for the economy to reach that point, as shown in Figure 3…The shock to labor markets was in many ways worse than the loss of output. The loss of employment (8.6 million jobs, or 6.3 percent of prior peak) was massive, roughly twice as bad as prior recessions. The 1982 recession had a maximum job decline of 2.8 million (3.1 percent of peak); the 1991 recession had a drop of 1.5 million jobs (1.4 percent of peak) and the 2001 recession had a loss of 2.6 million jobs (2.0 percent of peak.)Figure 1 shows the depth of the shock in sharp relief. This employment drop from peak to trough (6.3 percent) was notably larger than the output drop (4.0 percent).In addition, unemployment rates spiked, doubling and briefly rising to 10 percent. The more rapid drop for employment than output generated some odd statistical quirks. Labor productivity growth was strong at first as output fell less than hours worked. The compositional shift in which workers were still employed meant that wages actually rose - with average hourly earnings of production and non-supervisory workers continuing to grow at roughly 4 percent a year (the same as their pace in the prior two years) despite the massive shock and extensive slack in labor markets…. A slow and steady recovery followed the Great Recession’s official end in the summer of 2009, but because it was slow and the depth of the recession so deep, it took years to reduce slack in labor markets. The share of the population that was employed stayed well below prerecession levels despite steady job growth for years, and wages grew slowly. But because the slow-and-steady recovery lasted so long, many pre-recession peaks were exceeded, and eventually real wage growth began to accumulate for workers across the distribution. In fact, the business cycle (including recession and recovery) beginning in December 2007 was one of the better periods of real wage growth in many decades, with the bulk of that coming in the last years of the recovery….The economic expansion following the Great Recession included the longest streak of job growth on record. Beginning in October 2010, the economy added jobs for 113 consecutive months. The streak ended in March 2020 when the COVID-19 recession began…The length of the expansion allowed it to go through different phases. Early in the expansion, jobless rates remained stubbornly high, participation rates continued falling, and wage growth was slow. Compared to their outcomes prior to the recession, the least-skilled, lowest-wage workers in the labor market fared considerably worse than higher-skilled, higherwage workers. But by 2014, wages began to grow faster at the median. By 2015, prime-age labor force participation began to increase. In the last five years of the expansion, wage growth had picked up at the bottom of the income distribution, outpacing gains in the middle and at the top of the distribution.Employment rates for the workers with the least education rose further above their pre-recession level than those for college graduates. Vulnerable workers saw their labor market prospects improve considerably. The length of the expansion — which allowed the labor market to tighten — was critical to both bringing people back into the workforce and seeing wage gains pushed across the income distribution. Later in the expansion, though, real wages began to grow for all workers. Median wages began rising in 2012, and wages at the bottom of the distribution began rising in 2015. For the last five years of the expansion, in fact, real wages were rising most rapidly for workers at the bottom quintile….”

The Recovery From The Great Recession: A Long, Evolving Expansion: Extended Excerpt Image 2


Jay Shambaugh and Michael Strain, "The Recovery From The Great Recession: A Long, Evolving Expansion," National Bureau Of Economic Research, February 2021, https://www.nber.org/papers/w28452

In terms of productivity, “…Productivity, on the other hand, was notably slower in this recovery. Growth in output per hour worked (measured peak to peak) was well below that of the prior three business cycles. Scholars of productivity often note different eras of productivity growth booms and the last one from 1995-2004 generated good productivity gains in the 90’s and 00’s expansions, but during the 10’s expansion,there was never a return to such a level or even to the average productivity growth of near 2 percent of the prior 50 years.Lower productivity growth slows living standard growth and slows wage growth. The causes of the reduced productivity growth are too complex and numerous to delve into here, but may include a shifting industry mix towards services, a reduction in business dynamism, increased concentration in some sectors, insufficient R&D spending (including at the federal level), problems in the intellectual property regime, insufficient infrastructure and other capital spending, regulatory shifts, and simple limits of growth. In addition, though, it is distinctly possible that the extensive slack in labor markets reduced the need for productivity enhancements during much of the expansion…”

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