So why aren't wages rising?

May 14, 2017

 

Average hourly wages for workers on United States private non-farm payrolls rose seven cents in April as reported by the U.S. Bureau of Labor Statistics. In the previous month they rose by only two cents. Not exactly barn breaking pay raises.

 

 Slow wage growth spurs union rally in Wisconsin, 2011. Photo courtesy of Flickr and Rally to Save the American Dream

 

That was for all employees. It was worse if we look at pay for production and non-supervisory workers, as opposed to their bosses. These production worker average hourly wages in April went up by exactly zero over their wages in March. And looking at a longer span of time, their average wages in April were exactly one cent higher than they were a year ago in April 2016.

 

Meanwhile, prices are rising. Not particularly fast, but consumer prices have risen  2.2 percent over the year. So if we factor in the rising prices to get to how much wages have risen recently in terms of what those wages can buy, the paltry monthly rise in wages is even less impressive. That number, the rise in the "real average hourly wage" for production and non-supervisory workers rose zero point one percent in April 2017 over what it was in April 2016. The news was a little better in March of this year, when they rose 0.5 percent in that month. But a month earlier in February they had risen 0.1 percent.

 

The United State is very close to full employment. As of April 2017 the U.S. national unemployment rate is 4.4 percent. Three years ago when the  unemployment rate was above 6.0 percent, most economist probably would have said of an unemployment rate of 4.4 percent, "Well that would be full employment."  But in a full employment economy we would hope that we would see wages rising significantly faster than prices.

 

All this weak performance in wages takes place when corporate profits are at historic highs in levels and as a share of total U.S. income as measured by the country's GDP, a measure of  annual total income provided by the U.S. economy. And correspondingly, workers' total share of GDP has shrunk from around  65%  in past years to less than 60 percent recently.

 

What can explain such meager wage growth, especially with unemployment rates in the 4.5 percent range. One possible explanation is that the bargaining power of workers has  weakened significantly. Even at full or close to full employment, workers are less able to ask for or negotiate higher wages. In many industries, corporations have become larger, and a few big companies dominate the market.  Larger companies hold sway over large segments of the labor market and have more bargaining power when facing workers. Unions are weaker and in most labor markets nonexistent, so most workers are on their own. They may be facing more resistance from employers to an increase in pay.

 

This may be true even in a lower wage industry like fast food restaurants where workers confront large corporations like McDonalds. Even in a growing industry like health care there is concern that there may growing concentration of market  power in large health care providers like hospitals and  large corporate run nursing homes. Power to hold down wages often comes with market power.  About 10 million people are employed by hospitals and nursing home and nursing care facilities.

 

Manufacturing employment, a historically high wage industry sector, has been shrinking in the percentage of all workers that it employs and is down to just under nine percent of the work force. Because of automation, manufacturing output was holding to around 12 percent of total U.S. output in the face of a declining share of employment. Recently its share of total employment has fallen below 12 percent. At one time manufacturing employed a third of all U.S. workers.

   

The federal minimum wage is languishing at $7.25 per hour. It hasn't been increased since 2009 and it is now almost $3.00 per hour lower relative to consumer prices than it was in 1968. Without an effective wage floor provided by the minimum wages, it can be difficult for workers at the lower end of the wage scale to get wage increases.

 

Immigration, both documented and undocumented, has sometimes been cited as having depressed U.S. wages. However, most of the academic and professional studies have not shown any negative effect on average U.S. wages, and some have studies have shown a positive effect on average wages, This can happen because immigration increases the size of the labor force and that, in turn, fosters economic growth. Some research suggests that immigration may have decreased wage growth for U.S workers without a high school degree and slightly for college graduates, but not for high school graduates and those with some college.

 

Whatever the cause for wage stagnation, there is a hope it may end soon with the labor market tightening. Hasn't happened yet. It might take unemployment to fall further, maybe even below 4.0 percent.

 

References:

Graph of average hourly real wage for U.S. production and supervisory workers https://fred.stlouisfed.org/graph/?g=dIRI

 

BLS data on average hourly wages for U.S.workers

https://www.bls.gov/news.release/realer.t02.htm

 

Chart on labor share of U.S. total U.S. income

https://www.bls.gov/opub/mlr/2017/article/estimating-the-us-labor-share.htm

 

Graph of manufacturing output as share of U.S. total output

https://fred.stlouisfed.org/graph/?g=dIRW

 

Chart on manufacturing output as share of U.S. total oupupt

https://www.bls.gov/opub/ted/2016/employment-by-industry-1910-and-2015.htm

 

Immigration effect on U.S. wages

http://www.hamiltonproject.org/papers/what_immigration_means_for_u.s._employment_and_wages

 

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