Why the Economy Grows But Your Paycheck Doesn’t

Sluggish wage growth stands out as the Achilles’ heel of the otherwise sturdy U.S. job market. With the economy almost at full employment, and more than eight years since the recession ended, a sustained pickup in paychecks remains elusive. Stagnant incomes -- one reason for Donald Trump’s presidential win -- mean that workers aren’t fully benefiting from solid demand for labor. Federal Reserve officials are watching for signs of faster earnings growth that would push inflation closer to their goal. Investors will be watching Friday’s wage numbers for September, hunting for clues on how fast the Fed will raise rates.

That’s a puzzle. Falling unemployment typically spurs wages and increases prices, but that’s not happening, even with the jobless rate near a 16-year low. This is a direct challenge to the Phillips Curve, an almost six-decade-old economic model that says as unemployment drops, employers have to offer higher wages to attract workers, and inflation rises. While the curve isn’t helping clarify things at the moment, some economists believe it will eventually work the way it used to.