Washington, D.C., United States—The U.S. economy continues to grow, and wages follow closely.

In August, wages grew 2.9 percent, the fastest rate of increase since the economy started to grow its way out of the Great Recession of 2009.  An increase in new jobs has kept unemployment rate at 3.9 percent.

The recent wage numbers may indicate that a tighter labor market translates into higher hourly compensation.

For years, the labor market has been tightening as payrolls increased and the unemployment rate slowly fell.  The rate of earnings growth, however, has not correspondingly increased.  From mid-2010, the economy continued to add jobs at a rate of around 2 percent quarterly. Increases in average hourly earnings, however, didn’t come close to 3 percent until recently. Until now, wage growth didn’t correspond to a tightening labor market.

The U.S. Census Bureau reports that real median household incomes rose to $61,372, matching the 2007 levels. In other words, over a decade later real median household incomes have finally reached their pre-recession highs.

The present recovery, the slowest since the Great Depression, was also a rebound from the deepest recession in the postwar era. Typically, the more severe the recession the more robust the future economy. Think of it as Newton’s Third Law, but for financial markets: the generation of an equal and opposite reaction requires that a more severe recession must be followed by a more robust expansion from the trough of a business cycle. This has not been so since 2008. The U.S. economy has struggled to top 3 percent growth since the financial crisis, far below the average for previous recoveries in 2001, 1992, 1982, and 1975. Historically, lackluster labor force participation may be an important variable in explaining why.

Although 1.4 million men and 1 million women went back to work full time in August, the labor force still shrunk by 469,000. This drop helped keep the Labor Force Participation Rate far below the pre-recession norm of around 66 percent. The current rate of 62.7 percent is lower than at any point since the late 1970s, when the economy was wracked with the malaise of stagflation: simultaneous high unemployment and inflation.

The Labor Force Participation Rate is defined as the labour force divided by the civilian non-institutionalized population. The “labor force” is made up of all employed and unemployed persons in the economy over the age of 16.