- Low unemployment should mean fast wage growth – but we haven’t seen that in recent years.
- Three economists shared with Business Insider their insights as to why pay hasn’t gone up much.
- The leading reason: Companies are prioritising shareholder interest over their employees.
- Unemployment also isn’t as low as we believe it to be. Part of the reason more people aren’t participating in the workforce is, again, because wages are too low.
The US economy is growing at its fastest pace in four years. Unemployment recently sank to an 18-year low. That’s all led President Donald Trump to deem America as “the economic envy of the entire world.”
But, you wouldn’t know that by looking at your pay stub. Wage growth has been “sluggish,” as Business Insider’s Rich Feloni recently reported.
Even our nation’s top economists are baffled. Such low unemployment should mean that employers are kicking up pay in order to lure in workers. Yet, they’re not.
There’s no single reason for why wage growth has been dismal. Business Insider spoke to three economists to shed light on their theories on the conundrum: Jake Rosenfeld of the University of Washington in St. Louis, Economic Policy Institute senior economist Heidi Shierholz, and Brookings Institution senior fellow Jay Shambaugh.
Here’s what they shared:
Productivity gains have been minimal
A lack of productivity growth could explain the fall in wages, Shambaugh said.
Growth in productivity, which is the output we get from every hour of work, has been declining in the US, as well as across advanced economies globally.
Still, wages haven’t followed productivity gains in the longer run, according to the Economic Policy Institute. Productivity is up 243% since 1948, but wages are only 109% higher.
Companies are increasing their spending on benefits
Employers have been increasing their spending on benefits – particularly health insurance, as Pew Research Center reported. There’s also retirement-account contributions, transit subsidies, tuition reimbursement, and the like to take into consideration.
Wage and salary costs have grown 5.3% costs since 2001, adjusted for inflation, while benefit costs are up 22.5%.
While this is, as Shambaugh said, “a pretty small part” of the full picture, it may be keeping down workers’ pay in these past few years of economic growth.
Corporations are directing more of their money to shareholders and executives, not everyday workers
For decades, corporate profits and employee wages grew at a similar pace. But since 2002 or so, corporate profits have surged past worker compensation.
As The New York Times reported in July, “Corporate profits have rarely swept up a bigger share of the nation’s wealth, and workers have rarely shared a smaller one.”
Jared Bernstein, an economic adviser to former Vice President Joseph R. Biden Jr., told the Times that workers would have significantly more cash in their pockets had their share of the country’s wealth not shrunk so much. In total, that amounts to about $US532 billion, or $US3,400 per person per year.
Meanwhile, the majority of corporate profits have been going to corporate investors and chief executives, whose compensation is often based on stocks, or foreign mergers and acquisitions.
Tons of low-wage workers are finally re-entering the workforce
From a technical standpoint, Shambaugh said wage growth numbers may appear dismal simply because tons of low-wage workers are only just now recovering from the Recession. They’re now re-joining the workforce and lowering the median wage.
“If you keep adding people who are low-wage workers, it will bring down the whole wage series,” Shambaugh said.
But that doesn’t explain why wage growth has been low in the long-run.
Unemployment isn’t as low as we think it is
Tons of job openings and not a lot of workers available to fill them ostensibly cause wages to go up. Employers raise wages in order to encourage their employees to stick around.
However, the unemployment rate of 3.9% only accounts for those who are seeking work. So, Shierholz said, there are many jobless people out there who aren’t looking for work. That means that the job market is not as tight as it seems.
Fewer working-age adults are participating in the labour force or job search than before the recession. Part of the reason is that wages are too low to incentivise people to work; they might find it more economically viable to care for children or stay home if they have health problems.
“The wages are so low that it’s hard to draw people into the labour force,” Shambaugh said.
Membership in unions has declined, which means fewer wage gains to those both in and out of unions
Following World War II, one in three workers belonged to a union, according to Rosenfeld, who wrote “What Unions No Longer Do.” That’s since fallen to one in 10.
The people who lose out on the decline of unions aren’t just union workers themselves, said Rosenfeld. “Union spillover effects” meant that non-union workers also enjoyed wage boosts because their employers would peg pay to the union rates so that their workers didn’t unionize.
Non-managerial construction, transportation, and manufacturing workers were most likely to be unionized, said Rosenfeld.
Shareholders don’t want companies to raise wages
When American Airlines announced last year they would be giving raises to pilots and flight attendants, the company’s stock tanked by 5.2% in one day.
“This is frustrating. Labour is being paid first again. Shareholders get leftovers,” Citi analyst Kevin Crissey wrote in a note to clients, the Los Angeles Times reported.
In fact, airlines are facing a massive pilot shortage right now because labour hasn’t been getting paid first. Pilots’ median earnings decreased by 9.5% from 2000 to 2012, according to a Government Accountability Office report.
Rosenfeld said that market moves like that have helped keep wages low.
“There is this idea that shareholders are the one set of stakeholders that deserve the largest share of a company’s profits, rather than balancing the need of other stakeholders like workers or consumers,” Rosenfeld said.
In summary, economists say workers have lost much of their power
Elevating shareholders over the workers, the reduced presence of unions, and a general decline in labour standards have all taken power away from the workers.
“The tight labour market shifts bargaining power to workers, but the other things like labour unions and strong labour standards have taken a huge hit over the past four decades,” Shierholz said.
Now, 3.9% unemployment isn’t enough to drive up wages.
“Given that those other things that have given bargaining power to workers have eroded so dramatically, you need a tighter and tighter labour market to spur meaningful wage growth,” she said.