Arnold Kling writes:
I challenge any supporter of the sticky-wage story (Bryan? Scott?) to write a 500-word essay explaining how this graph does not contradict their view. If employment fluctuations consisted of movements along an aggregate labor demand schedule, then employment should be at an all-time high right now.
My working story:
The graph helps tell the story. Labor’s share began a secular collapse sometime in the 1990s, leading to a large run-up in loanable funds. That run up put large downward pressure on the natural rate of interest. This was offset for a time by finding ways of expanding the pool of credit worthy borrowers through financial innovation. Once a major set of those methods was revealed to be untenable the natural rate of interest collapsed not only below the Funds rate but well below zero. The large gap between between the natural rate and the Funds rate put large downward pressure on aggregate labor demand resulting in the Great Recession.
To have cleared the labor market with the pool of borrowers available in 2009, real wages would have had to make up for over a decades worth of missed decline. This was exacerbated by the fact that falling nominal wage disbursements (whether from pay cuts or layoffs) further depress the pool of eligible borrowers by raising real debt levels, requiring even further falls in the real wage.