Here’s What’s Causing Wage Growth to Flat-Line

Source: Thinkstock

Source: Thinkstock

The economy has steadily improved over the past several years — currently, the S&P 500 is flirting with record highs and headline unemployment is as low as it’s been since July 2008, 5.8%. But much of the wealth generated during the recovery has been captured by the nation’s top earners and has yet to trickle-down, leaving the middle class worse off now than it was 15 years ago. In fact, barring dramatic changes to the way we manage the economy, it’s unlikely that any of the new wealth will ever trickle down. Despite the gains on Wall Street, wages for most working Americans have stagnated.

The issue of stagnating wages is not new. In fact, we’ve looked at the effects of stagnating wages and growing inequality before. But there’s new data to consider, including recent numbers released by the Bureau of Labor Statistics, wage gains have been running at around 2% annually, and during the three-month period ending in September, employee compensation inched up 0.8%. That’s growth, yes, but it is hardly enough to keep up with inflation, let alone keep pace with the exploding costs of living. But why has wage growth become so slow? Yes, the economy is sluggish, although it has improved dramatically since 2008-2009, but why is it that none of that economic success is manifesting itself in the form of raises for average Americans?

Naturally, it’s a complicated answer. The most direct and straightforward response is that it’s still a buyer’s market out there for labor. There are simply more people looking for jobs than there are actual positions, meaning that businesses are able to be more choosy with prospects, and use economic circumstances to their advantage to keep wages low. Obviously, this is an oversimplification, but it’s the most direct answer.

James Sherk, a policy analyst in labor economics for The Heritage Foundation recently wrote a piece exploring three of the most often-cited reasons for slow wage growth by economists. To explain the 1.4% real growth in wages between July 2009 and August 2014 — which adds up to an average hourly increase of only 33 cents — Sherk says economists rely on three main theories: reduced labor demand, increased labor supply, and the Affordable Care Act.

The first two theories can be credited to the business cycle. As mentioned above, simple supply and demand of labor is at employers’ advantage at this time, but won’t necessarily remain that way. The other theory, that the Affordable Care Act is a main culprit, may be a part of the problem, but likely not a huge piece. Although it has raised costs for employers, it’s difficult to place the blame on a single piece of legislation, signed into law in 2010 can’t really account for three or four decades of stunted wage growth.

In a nutshell, these arguments come down to the fact that there is a surplus of labor on the market, and that regulations passed by the government have made hiring workers more expensive, so to compensate, employers are paying less in wages. That makes sense when applied to the past five or six years. But the wage stagnation problem hasn’t been confined to that time frame. Data dating back into the early 1970s shows that the true rift began at that time, when worker productivity continued to increase at a steady level, but wages seemed to stop dead in the water.

The Economic Policy Institute has looked into the issue at length, noting the growing rift between productivity and wage increases. “Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent,” the EPI says in a 2012 study. “The pattern was very different from 1948 to 1973, when the hourly compensation of a typical worker grew in tandem with productivity.”

You can also read more about the effects of wage stagnation on the middle class, as well as widening inequality in an earlier piece from The Cheat Sheet.

While this does explain some of the reasons behind growing income inequality, it doesn’t get to the meat as to why wages stalled during the ’70s, and why they have yet to catch up.

Big societal and business changes instituted over the past few decades have undoubtedly paid a big part in lowering average wage levels overall. Among those factors are things like companies slashing benefits and more and more young adults being placed into unpaid internships, many of which are often illegal. But there are also policy and legislative changes that have been and continue to be instituted that play in the favor of businesses. Organizations like ALEC have basically allowed corporations to write their own legislation, and allow them to be passed on to members of Congress who are often more than happy to oblige. Of course, when this sort of thing is allowed to go on, corporations are going to pass laws that benefit only them, not workers.

Anti-union laws have also become mainstream, as we’ve seen with some of the more intense political battles that have played out in states like Wisconsin and Ohio. By demonizing workers’ groups and unions, politicians acting on behalf of the country’s more prolific corporate powers have been able to convince many people — who would likely benefit from an increased union presence in their state, or union membership themselves — that the unions are actually the problem, rather than part of a solution. The disfranchisement of unions, and their ability to collectively bargain for higher wages, naturally has led to lower wages for earners of all stripes.

The main catalysts behind stagnating wages really boil down to inflation of labor supply and the loss or forfeiture of power on the worker’s side to effectively bargain for higher wages. There are other issues at play, but the root of the issue is that there simply aren’t enough jobs to go around, and when workers need to compete for positions, they’re going to do jobs for lower pay than they would otherwise, thus keeping wages low.

There are ways to help lessen the effects, like raising the minimum wage to a reasonable level and increasing public services, but with the current state of Congress, it’s doubtful anything meaningful will be instituted any time soon.

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