The cost of job loss, long-term unemployment, and wage growth

Abstract

Since the end of the Great Recession in June 2009, and despite the current low unemployment rate, wage growth in the United States has been substantially slower than in previous recoveries. This paper argues that the cost of job loss—the one year income loss associated with job loss—and the long-term share of unemployment can account for slow wage growth relative to other labor market variables. Using a wage-Phillips curve for three sample periods, empirical evidence suggests that the cost of job loss and the long-term share of unemployment better explain and forecast wage growth in the United States, particularly during the recovery from the Great Recession relative to conventional measures. This finding better highlights and captures deeper trends in the U.S. labor market, specifically the declining bargaining power of labor.