Where's the Wage Growth?

There may be as many theories as there are economists on why pay isn’t rising

Stephen Miller, CEBS By Stephen Miller, CEBS June 25, 2018
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updated on Aug. 24, 2018


The wage gains that economists expect in a tight labor market still haven't emerged, recent pay data show, and there's no shortage of reasons as to why not.

"The rise in consumer prices over the last year has effectively wiped out any wage increases for nonsupervisory workers," The New York Times reported in June. "That is odd for an economy with a tight labor market, with unemployment running at 3.8 percent."

The Times quoted Federal Reserve Board Chairman Jerome H. Powell, who called it "a bit of a puzzle" why wage gains haven't been stronger. Powell suggested that employees would see higher pay as the economy continued to strengthen.

And yet, "For the last few years, it looked as though the average increase was going to be heading north of 3 percent, but in reality, that hasn't happened," said Bruce Johanson, principal partner at DBSquared, a compensation software firm based in Fayetteville, Ark.

In addition, "with the 2018 U.S. inflation rate hovering just over 2 percent, real wages for this year's grads are virtually flat" compared to last year, said Maryam Morse, senior client partner at consultancy Korn Ferry, based in the firm's Dallas office.

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.

Salaries for highly skilled workers, however, should rise if skilled talent shortages take hold in the U.S., Morse said. "While overall wage increases are just keeping pace with inflation, salaries for in-demand workers will skyrocket if companies choose to compete for the best and brightest on salary alone" should a skills shortage become acute. So far, however, evidence that this is happening is mostly anecdotal.

Wage-Growth Restraints

While low and falling unemployment traditionally put upward pressure on wages, a majority of 60 economists surveyed by The Wall Street Journal identified factors that were meaningfully holding U.S. wage gains to around 3 percent per year, such as:

  • Globalization. Foreign competition might put pressure on some U.S. companies to remain competitive with rivals located overseas in low-wage regions.
  • Low productivity growth. Gains in labor productivity can allow employers to boost workers' take-home pay, but increases in worker productivity have been historically weak.

"Roughly speaking, wages grow when productivity grows and price inflation increases," said Michael Strain, director of economic policy studies at the American Enterprise Institute (AEI), a free-market think tank in Washington, D.C. "We have had quite low productivity growth this [post-recession] cycle, and if you take productivity growth and add the rate of inflation to it, you get something that’s not far from the wage growth that we’re seeing."

Automation

The rise of automation powered by new developments in robotics and artificial intelligence also is holding pay raises in check for middle-skills jobs, U.S. executives said May 24 on a panel at the Federal Reserve Bank of Dallas, Axios reported. To command more income, workers will need to shift to higher-skilled jobs, the executives advised.

Troy Taylor, chairman and CEO of Coca-Cola Beverages Florida, said he would reduce staff gradually and "invest in automation," according to the Axios report. When the moderator asked whether there would be broad-based wage gains again, Taylor said, "It's just not going to happen," as gains go mostly to technically skilled employees. As for a general raise: "Absolutely not in my business," Taylor said.

Health Care and Other Benefit Costs

As nonwage benefits are beefed up by U.S. employers, such as expanded paid leave and performance-based bonuses, fewer dollars in their total rewards budgets may be available for salary increases.

But health care benefit costs are a prime suspect.

"The rise of health-care costs is the most important reason wages have not increased more for U.S. workers," Nobel economics laureate Edward C. Prescott and Lee E. Ohanian of the Center for the Advanced Study in Economic Efficiency at Arizona State University, wrote in the Wall Street Journal in 2018. "The extra compensation is swallowed up by health-insurance premiums."

A new white paper provides evidence that "the rising values of fringe benefits, such as health insurance, may have offset potential wage gains for middle-income workers" despite falling unemployment. The authors, Jeff Larrimore of the Federal Reserve and David Splinter of the congressional Joint Committee on Taxation, contend that when factoring in the cost of health coverage, "total compensation may be higher than previously believed, also implying that employer-sponsored health insurance benefits may represent a larger share of employee compensation." 

Economics columnist Robert J. Samuelson wrote in the Washington Post:

The problem is plain: We'd all like both cheaper health insurance and higher wages, but the way the health-care system is operating today, we might get neither. As insurance premiums get more expensive, inflation-adjusted ("real") wages will continue to stagnate or decline.


[SHRM members-only how-to guide: How to Establish Salary Ranges]

Declining Unions

"Deunionization has a ripple effect," argued Zane Dalal, executive vice president at Benefit Programs Administration, a Los Angeles-based administrator of benefits plans. "We've seen stagnation in wages since union membership began to drop in the 1980s," he commented, expressing a view common among union advocates. "This stagnation has led to erosion of the middle class and the widening wage gap" between executive and nonmanagement jobs, he said.

The U.S. Supreme Court's ruling in Janus v. AFSCME, which overturned state laws that allow public-sector unions to collect mandatory fees from workers who decline union membership, could help to keep pay raises restrained, Dalal believes. "Nearly every time wages have gone up in the private sector, it was because wages went up in the public sector as a direct result of collective bargaining agreements led by unions," he said.

Older Employees

Some economists contend that the aging of the U.S. population may be depressing wage growth as highly paid Baby Boomers retire. "If you have a situation where older workers are retiring faster, that can put downward pressure on wage growth because younger workers tend to be relatively less paid than older workers," said AEI’s Strain.

Others read the demographic data differently.

DBSquared's Johanson suggested, for instance, that "Baby Boomers aren't retiring at age 65" in large enough numbers, "and this is causing organizations to continue to employ them at their higher salary levels compared to the younger generations with less time in their respective companies. We believe that as more of the Baby Boomers finally retire, this will help to realign and shift salary dollars to the younger employees."

As that happens, "we should finally see annual salary budgets moving above 3 percent and without significant new salary dollars added to the annual payroll budget," Johanson said.


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