Why Do Wages Rise?

The health of an economy can be measured using a variety of indicators. Common ones include the unemployment rate, monthly job creation figures, and GDP—or the total value of all goods and services produced in an economy over a given year. But a less frequently used, although very important, indicator is wage growth.

While it may not be the first thing to come to mind when thinking about the economy on a larger scale, wage growth is directly linked to things like sales performance at stores and restaurants, fluctuations in the housing market, and can even increase the standard of living. And when it’s your wages going up–it becomes very important.

Because as wages rise, Americans spend more money.

But the question is, what causes wages to rise? Well, there are several things that influence wage growth.

Number one. Employers simply have more profits so they are financially able to raise worker compensation. These extra funds could be the result of a jump in business performance—caused by a hike in sales or a public policy change—such as a reduction in the tax rate.

Number two. The market for labor becomes more competitive. This situation can arise when the number of job openings surpasses the number of people looking for employment—a circumstance referred to as a tightening of the labor market. The lack of available workers forces businesses to compete over job candidates by outbidding each other with perks, like higher wages, better working conditions, more vacation time, and other benefits.

Number three. Typically, wages rise with skill and experience. Whether the skill or knowledge is acquired from a traditional higher education institution, trade school, or simply from on-the-job experience, wage levels will fluctuate based on the demand for these respective attributes. The rule of thumb? More education and experience in a field with room for growth equals higher wages.

Wage levels can change for a number of reasons, but one thing is for sure. When the economy is doing better and unemployment is low–wages will be on the rise.