Yesterday I noted that, while the problem of lower labor market participation among the working age population hasn’t entirely resolved, it is getting close to resolving due to the surge in entry into the jobs market in the last two years. As the graph below shows, not only has the prime age population grown by about 2 million in the last 2.5 years (blue), but nearly an additional 2 million (1.5% of 125 million) have entered the labor force (red):

But,while in accord with the last two expansions, nominal wage growth bottomed out once the U6 underemployment rate fell to roughly 9%, for nonsupervisory workers, it has languished at about 2.5%:

This is less than the roughly 4.5% peaks in the past 3 expansions.

Why?

MONOPONY VS. SKITTISHNESS VS. TABOO

One explanation is in the first graph above itself. All else being equal, even accounting for population growth, there are 2,000,000 more candidates for jobs in the prime age labor force than there were 30 months ago. More competition for jobs should act to hold down compensation.

But recently another explanation has been written about at length: monopsony in the labor market. In more plain english, this is a monopoly or at least oligopoly on the demand side for labor. Increased market power to hold down wages, it is argued, is having that exact effect:

[I]n recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages…..[I]n many areas of rural America, [where] large-scale employers that dominate their local economies[, w]orkers can either choose to take the jobs on offer or incur the turmoil of moving elsewhere. Companies can and do take advantage of this leverage.

Yet another source of labor market power are so-called noncompete agreements …. These agreements prohibit workers who leave a job from working for a competitor of their former employer.

Almost a quarter of all workers report that their current employer or a former employer forced them to sign a noncompete clause…..[S]tudies have found that employer concentration has been increasing over time and that this concentration is associated with lower wages across labor markets.

….{Monopsonistic f]irms [which pay less than “competitive” wages] bear the loss in workers (and resulting lowered sales)  in exchange for the higher profits made off the workers who do not quit.