Stagnant wages leaves central banks fretting over fate of workers

Thu Jul 24, 2014 3:27pm EDT
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By Howard Schneider and Eva Taylor

WASHINGTON/FRANKFURT (Reuters) - After injecting trillions of dollars into the global financial system over the last six years, the world's central bankers now face a vexing question: why is so little of it showing up in workers' paychecks?

From the U.S. Federal Reserve to the Bank of England, the Bank of Japan and the European Central Bank, slow wage growth is a major concern as central bankers continue to look for signs of a solid recovery.

The standing assumption has been that low interest rates would support growth, growth would translate into jobs, and tighter labor markets would lead to rising pay.

But the tepid pace of wage growth this far into the recovery "makes them very nervous," said Joel Prakken, a senior managing director at the Macroeconomic Advisers consulting firm, because it strikes at one of the foundations of developed world success: solid household incomes and consumer spending.

It is a tricky issue for central banks, which face the fact that monetary policy can do little if anything to directly create a job or raise a wage.

Policymakers can set monetary conditions to pull the economy out of a trough and keep credit flowing - and through those mechanisms their crisis response arguably helped keep tens of millions of people at work.

But as the recovery matures, the lack of wage growth in the developed world stands out as an area where loose monetary policy has generated underwhelming results.

Economists like Prakken, former Treasury Secretary Lawrence Summers and others have begun to debate whether much larger structural issues are coalescing to keep wages down.   Continued...

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst