Posted on 08/10/2006 5:06:35 PM PDT by hedgetrimmer
Perhaps the oddest and most depressing fact about the U.S. economy these days is the lack of real wage growth. The unemployment rate has been below 5% since December, and productivity growth is still looking strong. Yet wages and salaries, adjusted for inflation, are down for virtually every broad occupational category.
According to the latest numbers from the Bureau of Labor Statistics, average hourly earnings for production and nonsupervisory workers are up by 3.8% over the past year. That may sound halfway decent, but it still lags the 4.3% increase in consumer prices over the same period (see BusinessWeek.com, 8/4/06, "July Jobs: Pretext for a Fed Pause?"). Even managers and professionals are taking the hit: Figures from the BLS show that their real wages have fallen by 1.8% and 1.1%, respectively, over the past year.
This is not what I expected. Historically, real wages rise along with productivity once labor markets are tight enough. Based on the experiences of the 1990s, I was confident that wage growth was going to accelerate once the unemployment rate dropped conclusively below 5%. Still, the wage picture remains bleak.
Key Differences. True, there are some hopeful signs of life. According to the National Association of Colleges & Employers [NACE], "starting salary offers to new college graduates continue to climb." For example, the starting salary for accounting graduates is up 5.5% over the previous year. That's more than the 4.3% rise in consumer prices and well ahead of the 2.6% increase in all prices except food and energy.
But in a lot of fields that NACE tracks, the gains are not enough to keep up with inflation. Initial salary offers for computer science majors are up 1%, marketing majors saw an increase of 0.9%, and liberal arts majors a meager 0.2%, with these teeny increases obliterated by inflation.
But if the phenomenon of falling real wages is clear, the explanation is not. In the 1980s and 1990s, there was a sense that education and the ability to make use of new technology were the key differences between those who did well and those who didn't. Workers who could adapt to the new world of information technology prospered; those who could not saw their wages fall or their jobs disappear.
Low-Wage Competition. Today, neither a college education nor computer literacy is enough to guarantee rising real wages. Some people are obviously doing better than others. Workers in the financial and health-care industries, for example, have seen their real wages drop by less over the past two years than those in retailing. But in no part of the economy are real wages doing well.
There are two alternative explanations for this broad-based problem. The first one has to do with globalization. Competition with low-cost workers in China, India, Eastern Europe, and the rest of the developing world may finally be taking its toll on American workers. With a surplus of labor around the world, real wages will stagnate, while returns to capital will rise.
Now, that's not bad news for everyone. If you own a home, you own a capital asset whose value has soared in recent years. If you have a 401(k) retirement account invested in the stock market, its value, too, has likely gone up since 2003. And if you are a taxpayer -- as most of us are -- it's a plus that state and local pension fund reserves have gone up more than 9%, or $245 billion, over the past year alone, in large part because of stock market gains. This makes it less likely that taxes will have to be hiked in the future to pay for government employee retirement benefits.
If the globalization answer is correct, then in general it's the young who are going to be hit the hardest. They don't have homes or other financial investments, and they have their whole working lives stretching in front of them, so weak real wages hurt them badly. For middle-class Americans aged 50 and higher, the math may be much different, since they likely own their own homes, which have greatly appreciated.
Overestimated? The other explanation for weak real wages is much more gloomy. Remember that wages usually track along with productivity. I hate to even say it, but what if the productivity gains of recent years have been overestimated? The latest revision of gross domestic product, released on July 28, seems to have cut productivity growth in 2004 and 2005 by almost half a percentage point. Further revisions of the statistics could push the number down even more.
No, I haven't swung from my usual optimism into the doom-and-gloom camp. But whatever way you cut it, the stagnation of real wages is not a good thing.
Time of the general prosperity in USA was based on mass consumption. Reducing the wages for the average people might lead to the contraction of economy as the demand for the luxury goods and for the servants cannot propel real growth.
Also the cheap labor is an enemy of technological progress as the millenniums of human history has demonstrated.
Thanks for admitting your error. And the presence of illegal aliens does depress wages.
Why do you exclude food and energy? Thats just sloppy.
Are you saying American workers don't have to pay higher food and energy prices with their 1.1% pay raise?
Only in the sectors where they congregate.
The salary of a laywer won't drop because some illegal is out picking grapes.
Insurance companies negotiate with health care providers for reduced rates. I'm not sure how much illegal aliens impact the cost of insurance, I think the burden falls more heavily on the taxpayer and the uninsured with some assets.
And, if you are in a sector where they congregate, well, you should have been smarter about your career path.
Spot on.
Every time you pay $8.00 for an aspirin at a hospital with your insurance, you are funding illegal alien health care.
According to the Bear Stearns report, "The Underground Labor Force Is Rising To The Surface", illegal immigration is twice the official estimates, and off the books labor is skewing just about all of the data. For instance, if an employer hires workers that are not counted and his productivity goes up, it artificially raises productivity overall. I would imagine that the 3.8% figure might actually be less if earnings are spread over over a larger workforce than is reported, but I don't know how that number is calculated.
Thats a good one. We all know that no American is suitable to become a tradesman. Its silly that some Americans think they are good at trades. It should have been schooled out of them in the government school system. No Child Left Behind isn't draconian enough.
I feel bad for factory workers who are getting screwed and have lived their entire life working in factories.
But, for 20 years, perhaps longer, this nation has been transitioning to an information economy.
That is where the jobs will be, and anybody in college now would be stupid to pursue production work.
Hey, they congregate in CA, but I guess that kind of proves your point.
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