2018 Series • No. 18–2
Current Policy Perspectives
Wage Inflation and Informal Work 
While U.S. unemployment has fallen to a very low rate, wage inflation has remained modest. Indeed, recent year-over-year wage growth values have fallen short of their predicted values by 0.5 to 1 percentage point, and recent acceleration in wage growth relative to declines in unemployment also has fallen short of historical norms. The authors examine one possible explanation for this wage-growth puzzle: The labor market is not as tight as the unemployment rate indicates. Specifically, they investigate the possibility that informal “gig” work embodies an economically significant amount of labor market slack that is not captured in the U-3 unemployment rate and other standard estimates of slack.
Using unique data from their Survey of Informal Work Participation—included in the Federal Reserve Bank of New York’s Survey of Consumer Expectations—the authors find indirect and direct evidence for this hypothesis.
Key Findings
- Since the start of 2015, the U-3 unemployment rate—the commonly cited measure of labor market slack—has fallen by more than a full percentage point, while quarterly wage growth has been flat, and year-over-year wage growth has actually declined. These facts are puzzling because economic theory predicts that wage growth should increase as unemployment falls.
- The authors use their survey data on hours supplied to informal work to estimate the number of full-time-equivalent jobs (FTEs) represented by such work, for the United States as a whole and by census division. As of 2015–2016, the FTEs of informal labor, expressed as a share of the labor force, amounted to between 2.2 percent and 5.7 percent, depending on the census division.
- An examination of the variation across census divisions in wage growth and informal work shows that quarterly wage growth has a significant negative association with FTEs of informal work, consistent with the notion that informal work constitutes labor market slack. At the same time, the U-3 unemployment rate by census division bears no significant association with quarterly wage growth, suggesting that U-3 is less informative of slack.
- Most informal work participants view informal and formal work as substitutes for each other—the vast majority would drop hours of informal work in exchange for added hours of formal work if the former yields the same or lower pay compared to the latter. These findings reinforce the view that informal work represents labor market slack that may help to account for the puzzling combination of slow wage growth and very low U-3 unemployment.
Exhibits
Implications
The authors find that their measure of informal labor is negatively associated with wage growth on the census division level, and they observe no significant association between wage growth and the U-3 unemployment rate. These results suggest informal work represents added potential labor supply to the formal market that could reduce pressure on measured wages.
The authors’ estimates of the extent of slack embodied in informal work are economically significant. If, as the findings suggest, the low U-3 unemployment rate masks a considerable amount of labor market slack, and that slack puts downward pressure on wages, then central bankers might want to keep tabs on informal work activity as a measure of slack in order to help forecast wage growth.
It is also possible that informal work participation is a response to weak wage growth; that is, because wages are low, individuals seek out other work opportunities to earn sufficient income. While this explanation doesn’t necessarily imply that informal work represents slack, it does indicate a weak labor market in which many individuals feel insufficiently employed despite the low unemployment rate.
Abstract
Despite very low unemployment in the United States in recent months, wage inflation has remained modest. This paper investigates the possibility that there is hidden labor market slack in the form of informal or gig economy work, which may help explain this wage growth puzzle. Using unique data from 2015 and 2016 that we collected through the Survey of Informal Work Participation—part of the Federal Reserve Bank of New York’s Survey of Consumer Expectations—we find indirect and direct evidence for this hypothesis. First, we find that a measure of informal labor is negatively associated with wage growth at the census division level, while we observe no significant association between wage growth and the U-3 or U-6 unemployment rate. Second, most informal work participants in our survey report that for some increase in pay, they would drop hours of informal work in exchange for added hours of formal work. Together our results suggest that informal work represents an economically significant amount of potential labor supply to the formal market that may reduce pressure on measured wages. We also discuss other interpretations of our data.