Wages Stagnate Despite Thriving Job Market

By Joseph Coombs Mar 6, 2015
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Consistent growth in the job market has provided plenty of good news for the U.S. economy’s ongoing expansion, but that progress has not been accompanied by improvements in wages. And a growing chorus of experts say incomes could remain stagnant for quite some time.

Rules of supply and demand typically dictate that when the need for workers increases and competition for those people subsequently rises, employers need to offer more-competitive pay packages to recruit and retain top talent. And yet, this has not occurred in widespread fashion due to a number of factors, including the fact that millions of people are still out of work and employers have grown accustomed to higher productivity with smaller staffs and leaner salary budgets.

“The poor performance of American workers’ wages in recent decades is the country’s central economic challenge,” wrote Elise Gould in a Feb. 19, 2015, report from the Economic Policy Institute (EPI), a Washington, D.C.-based think tank. “Though the labor market has continued to strengthen, it has not tightened nearly enough to absorb the millions of potential workers sidelined by the lack of job opportunities—and not nearly enough to generate real wage growth.”

Gould, EPI’s senior economist, also debunked the widely held belief that those with higher academic credentials are enjoying stronger gains in income. According to her research, workers with a four-year college degree saw their real hourly wages (those adjusted for inflation) fall 1.3 percent from 2013 to 2014, and those with advanced degrees saw an hourly wage decline of 2.2 percent during that same time.

There have, however, been some good signs amid these negative trends. A net of 12 percent of manufacturers and a net of 18 percent of service-sector companies raised compensation for new hires in February, according to the Society for Human Resource Management’s Leading Indicators of National Employment (LINE) report.

Although many organizations are still keeping new-hire compensation flat, those net totals represented four-year highs for the month of February, according to the LINE data. February also marked the eighth straight month that a four-year high for new-hire compensation was reached in manufacturing, and the third straight month for services. Job creation is also showing no signs of slowing down—a net of more than 2 out of 5 manufacturers (44.5 percent) and service-sector companies (44 percent) are expected to conduct hiring in March, according to the LINE index.

Elsewhere, Wal-Mart’s recent announcement that it will raise wages has been viewed by many as a boost for workers in the lower-income brackets. The world’s largest retailer said it will increase its new-hire rate to $9 an hour in all of its U.S. markets in April, a change that would affect 500,000 workers in the first half of 2015. Wal-Mart also said it will increase its current U.S. associates’ wages to $10 an hour or higher in February 2016.

Shortly after Wal-Mart’s decision, clothing retailer TJ Maxx, which also owns Marshalls and Home Goods, announced on Feb. 25 that it will increase its pay rate to a minimum of $9 per hour for its employees.

“It’s a positive thing,” Gould said, speaking about the retailers’ wage increases. “I’m not sure it was done in response to a tight labor market or if it was done as a result of pressure from the media and worker protests. It’s drawing attention to the issue, which is good. But what is interesting to me is that, if this were a normal environment for wage growth, these moves probably wouldn’t have even generated any attention. It’s an indication of how poor the situation is at the moment.”

Despite the recent headlines, wage inequality is not a new phenomenon. Real average hourly wages haven’t advanced for decades, according to a Feb. 23, 2015, article from the Wharton School at the University of Pennsylvania. The U.S. average hourly wage of $20.80 in January 2015 was virtually the same as it was in January 1973, when adjusted for inflation, according to the U.S. Bureau of Labor Statistics.

Peter Cappelli, a professor of management and director of the Center for Human Resources at Wharton, said there are longer-term issues with wage growth that are unrelated to economic cycles.

“The big change over the past couple of decades and especially since the Great Recession has been the shift in how the economic pie has been divided,” Cappelli wrote in the Wharton article. “Customers are getting a good deal of it with much better products and services, if not always at lower prices, then with increases that aren’t very big. Shareholders have been doing well with a booming stock market. But employees have been doing poorly.”

The recent drop in the unemployment rate, coupled with a rise in job openings, “ought to improve workers’ bargaining power in wage negotiations with employers,” according to an opinion piece by Gary Burtless, senior fellow for economic studies at Washington, D.C.-based think tank Brookings Institution. But that hasn’t been the case, he said, even as productivity has made strong gains.

“Since the start of the current recovery, improvements in compensation have trailed improvements in worker productivity by a wide margin,” Burtless said. “Company owners have captured a record-high percentage of the value added by businesses in the nonfarm sector; workers have seen their share of output fall to an all-time low.”

Until there is less “slack” in the labor market and employers feel added pressure to raise wages, solutions may best lie in the realm of public policy, Gould said.

“The Federal Reserve can keep interest rates low, because the inflationary pressure still isn’t there,” she said. “That would be a start. It would help to update overtime provisions in order to improve eligibility for more workers, because wage theft is still rampant. There are a number of minimum wage increase efforts taking effect, as well. We can do a lot of positive things to change this situation.”

Joseph Coombs is a senior analyst for workforce trends at SHRM.​

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