Why Have Some Wages Stopped Growing?

9/21/2018
 

News stories in recent months have examined why many workers' paychecks haven't grown appreciably since the end of the Great Recession—especially now, when the economy is strong, unemployment is at an all-time low, many industries are scrambling to fill jobs and the financial markets are surging.

In some respects, the economic dynamics contributing to this phenomenon took root long before the recession started in 2007, economists say. Automation and global outsourcing, the rise of a "knowledge economy" requiring cognitive skills, declines in labor union membership and the adjusted value of the minimum wage, and the consolidation of companies—all are developments that economists have warned for years could lead to a future where lower- and middle-income workers increasingly took home checks that couldn't cover basic living expenses.

It could be that this "future" is already here.

Workers notice the disconnect between the good news they hear about the current economy and what they see in their paychecks, said Pete Sanborn, managing director for human capital advisory at consultancy Aon Hewitt, which this year released the results of a survey that polled workers on what most engages them.

"In the U.S., pay has become much more of an engagement driver for people," he said. "It's now among the top three [things that engage employees]. So employees are saying, 'Hey, I may like what I do, but I'm just not happy with the stagnant pay.' So now there's more risk of losing these people, and typically those are your best people."

Yet it's doubtful that many workers truly understand the economic dynamics behind the phenomenon, said Ryan Nunn, policy director at the Brookings Institution's The Hamilton Project, which in 2017 published research on why wages have remained so flat in the U.S.

Wages have indeed risen for those in the top of the wage distribution—that would be those earning, on average, more than $27 an hour. But wage increases have largely stalled or grown only incrementally for those in the bottom and even the middle, according to The Hamilton Project's research.

"There is a big disparity [in wage growth] between those roles considered 'hot' and a lot of roles that are not just entry level, but also tend to be middle management and the like," Sanborn said. "There has not been much pressure to increase pay for these roles, as turnover for most companies has not been a significant risk and there is typically a supply of people to fill the roles when people leave or retire."

Economists attribute this wage stagnation to several dynamics.

Theory 1: Minimum Wage and Unions

While there have been increases in the federal minimum wage over time, "the decline in the minimum wage after adjusting for inflation has been part of the story," said Nunn, co-author of The Hamilton Project's research.

"When you adjust for inflation, the value of the minimum wage fell or has stayed stagnant for some time," he said. "The inflation-adjusted value is below what it was in 1968."

The decline of labor unions—and their role in bargaining for workers' pay—is also part of the story, said Anastasia Christman, a senior policy analyst and director of research at the National Employment Law Project (NELP), an employee advocacy group.

According to the Bureau of Labor Statistics, only 6.5 percent of people working in the private sector in 2017 were members of a union. The overall U.S. workforce union membership rate was 10.7 percent in 2017, down from 20.1 percent in 1983.

As a result, Christman said, "employers have the upper hand in setting working conditions."

The Society for Human Resource Management stated in a policy paper that it "believes in the fundamental right—guaranteed by the NLRA [National Labor Relations Act]—of every employee to make a private choice about whether to join a union."

Public- and Private-Sector Union Membership, 1956-2016

In 1956, about 27 percent of all private-sector workers belonged to a union; in 2016, that number was a little more than 5 percent. With this fall in union membership has come an increase in wage inequality. The spread of other labor market institutions—such as noncompete contracts, no-poaching agreements and collusion agreements by firms—could also be contributing to weaker worker bargaining power.

Theory 2: Productivity

The impact that labor productivity has on wages can be illustrated by looking at the typical manufacturing plant. Consider the number of widgets produced in a manufacturing plant each hour. That number should rise over time as businesses adopt new technologies and update their widget-making processes. More widgets produced in an hour of a worker's time theoretically means companies are selling more widgets, which should translate into higher pay.

"That's the theory," Nunn said. "But that hasn't necessarily occurred over the last 40 years."

Although productivity has grown, it has grown at a slower rate in recent decades than it did earlier in the 20th century.

Why?

"That's a difficult question to answer and the subject of a lot of research," Nunn said.

Low inflation also comes into the picture, Sanborn said. Although the U.S. inflation rate was 2.9 percent in June 2018—the highest it has been since February 2012 when it was also at 2.9 percent—it's still relatively low. As a result, many companies haven't been able to drive up prices for their products.

"Many companies [are] loath to increase pay levels because the market pressure is on increasing profit margins that would drive up share prices for publicly traded companies," he said.

Theory 3: Market Shifts

The labor market has shifted to a "knowledge economy," placing greater value on cognitive skills typically held by those with a college degree.

"For folks who have not attained a bachelor's [degree] or higher, they've missed out on the wage gains that came with an education," Nunn said.

Even so, he continued, the financial return on a four-year college degree has plateaued in recent years. And not all four-year college degrees are providing workers with the skills they need in today's economy, Sanborn said.

A 2018 Korn Ferry study analyzed the salaries of 310,000 entry-level positions from nearly 1,000 organizations across the United States. Based on the analysis, 2018 college grads will make, on average, $50,390 annually—just 2.8 percent more than the 2017 average of $49,000 and not that much more than prior years' graduates. Korn Ferry reports that its analyses of post-college starting wages since just before the Great Recession, adjusted for inflation, indicate that these wages have remained relatively flat for years. "Our [colleges] aren't really preparing people for the jobs needed for the future," Sanborn said. "Many people coming out of universities who would have been fine 20 years ago … today don't have the needed skills."

Theory 4: Automation and Outsourcing

Automation and global outsourcing have replaced U.S. workers.

"Companies are pushing hard to eliminate any human positions where technology—computer or robot—can complete the same task," said Bruce and Blair Johanson, principal partners at DBSquared, a compensation software firm based in Fayetteville, Ark., in a joint comment. Many retailers, for instance, "are moving quickly to checking out yourself, or soon a cart may [have the technology] to add up all your items and check you out automatically. This will eliminate the cashier entry-level position."

Pressure to increase shareholder profits has also convinced companies to invest in relatively cheap global outsourcing instead of domestic worker pay, Sanborn said.

"Companies are very conscious around spending," he added. "The harsh reality is that the number of jobs required in [some] industries is decreasing for the same amount of output, so you may have a situation where in the future for a store the same size, only half the number of people are required to run that store." The same soon will be true in such fields as hospitality, transportation, medical records and a range of others, economists say.

Theory 5: Relocation

Workers have become less likely to move to a different state or to a different job.

Typically, job-to-job mobility—when U.S. workers move from one state to another to take a job—translates into about 1 percent wage earnings growth per quarter, The Hamilton Project reported. But since 1990, that mobility declined by almost half, from 3.8 percent in 1990 to less than 2 percent in 2016.

Part of the reason is that as each U.S. region attracts a wider range of industries, those regions become more alike, allowing workers to find jobs locally that they would have otherwise had to relocate to obtain. Another reason is that occupational licenses and noncompete contracts can squelch workers' ability to pursue jobs outside their current state and employer. And some sociologists say that hourly employees who lack a college education are less willing these days to risk uprooting their families and leaving behind friends and an existing social structure to pursue job opportunities in an unfamiliar location, even when those opportunities offer higher pay and a better standard of living.

Theory 6: Consolidation

Business formation has declined, while corporate consolidation is on the rise.

Over the past several decades, startups have become increasingly scarce, with their share of all firms falling to 8 percent in 2014 from 14 percent in 1979. "The decline in young, fast-expanding firms has contributed to falling business dynamism and job churn," The Hamilton Project reported.

And, increasingly, mega-companies are swallowing up competitors and controlling larger parts of their industries. Those companies can then "essentially set a wage ceiling," NELP's Christman said.

"Many regions are dominated by just a few employers," Christman said. "For instance, in Louisiana, a few medical systems constitute a significant proportion of the largest employers in the state. This means that they can limit wage growth without worrying about losing skilled workers to other employers."

 
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