Does a Falling Unemployment Rate Imply Rising Wages?

Tuesday, June 23, 2015
labor market and wage growth

Unemployment has dropped significantly since the end of 2009, when it reached 10 percent, but does such a drop lead to higher wages? A recent Economic Synopses essay by Economist Maximiliano Dvorkin and Research Associate Hannah Shell examined the relationship between wage growth and unemployment.

Typically, this relationship is studied at a national level. However, not all areas of the country experienced the same labor market fluctuations. For example, the unemployment rate reached almost 15 percent in some states while remaining around 4 percent in others.

Because not all regions experienced the recent recession and subsequent expansion the same way, Dvorkin and Shell plotted year-over-year growth in nominal earnings against the unemployment rate for all 50 states over the period 2008-2013. The figure below shows the relationship between the two variables for all workers.

labor market and wage growth

Dvorkin and Shell noted, “As that data show, the negative relationship between unemployment and earnings growth seems to hold across states.”

However, not all wages react the same way to economic conditions, and the authors noted that the wages of new hires may be more sensitive to the state of the labor market. The figure below shows the relationship between earnings growth and the unemployment rate for new hires only.

labor market and wage growth

Dvorkin and Shell noted, “Although the negative relationship between unemployment and earnings growth does not seem as strong, in part because of higher volatility in the year-over-year earnings of new hires, it holds nonetheless.”

The authors concluded, “Since labor markets in the United States have substantially improved and are expected to improve even more, it is likely that nominal wages will increase at a faster pace.”

Additional Resources

Posted In Labor  |  Tagged maximiliano dvorkinhannah shellunemploymentwagesearnings
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.

Subscribe to
On the Economy

Get notified when new content is available on our On the Economy blog.

Email Alerts  |  RSS

About the Blog

The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Contact Us

For media-related questions, email For all other blog-related questions or comments, email