With the US unemployment rate at the lowest level in a generation and many industries reporting labor shortages, US wages are supposed to be rising. They aren’t.

For the past two years, inflation-adjusted average weekly earnings of US workers barely have risen with respect to the previous year. Low wage growth contributes to low inflation, which frustrates the Federal Reserve and most of the economics profession.

Real weekly earnings

A large part of the explanation – and perhaps the largest part – is that the American population is aging, workers are retiring later and critically, older workers of 55 years and over have far lower wage gains than younger workers.

Older workers tend to be more risk-averse, prize job security over wage gains and are less likely to switch jobs in pursuit of a pay increase. The impact of risk-aversion on wage gains was first suggested to me by Professor Edmund Phelps of Columbia University, a Nobel Laureate in economics.

Low productivity growth, including the shift of the labor force into such low-productivity service industries as health care, leisure and retail, is usually cited as the cause of sluggish wage growth. No doubt there is some truth to this.

Nonetheless, we can observe in the data the effect of the aging of the US population on wage growth.

Percent of workers 55+

The proportion of the workforce 55 years and older has doubled over the past 20 years, from around 12% in 1997 to 24% in 2018.

Part of this is due to an aging population and part is due to a higher level of participation in the labor force by older workers, either because they are healthier than earlier generations and more able and willing to work, or because they cannot retire comfortably on existing resources.

Labor force participation rate

The Atlanta Federal Reserve tracks wage gains for workers. This measures something different than average weekly wage gains, which reflect changes in the composition of the workforce, among other things.

The Atlanta Fed data separate wage data by age, education, profession and so forth. As the chart below makes clear, older workers have far lower wage gains than younger workers.

Year-on-year nominal wage gains

Wage increases for workers aged 55 and over were only 2% year-on-year at last count, less than the headline rate of inflation, while wage gains for workers aged 25-54 were at 3.5%.

Whether the difference stems from risk aversion, as I suggested above, or differential skill levels, or yet some other factor, is a matter of conjecture. What is clear from the data is that the demographic shift depresses wage gains.