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.
FYI
So what happens when those 50+ homeowners start trying to sell their homes to the younger low-wage workers without capital?
Yes, returns to capital are rising. Perhaps it is not a good idea to rely on wages for all of your income?
Stock dividends taxed at low rates look good to me.
There isn't many illegal immigrants with college degrees and computer skills.
The upper classes and the owners of capital have figured out ways to get a greater piece of the economic pie. Workers and wage slaves get a smaller piece than 10-20-30-40 years ago
Which is better Low wage growth or Inflation.?
Oh, he gets it all right. By avoiding the increases in total compensation he gets to bash the Bush economy and push the left agenda that Business Week has become famous for.
Employers are picking up more and more of the rapidly increasing cost of healthcare. When included, total compensation shows an increase over the rate of inflation.
I get a 3% annual raise---but what my employer shells out for my health care, on an annual basis, has increased about 15%. If you TAXED all health care benefits, you'd see American workers' wages shoot up . . . but their real purchasing power would likely drop some.
Obviously the only answer is to raise tariffs.
I read an article a few years ago that tried to correlate wage rates for U.S. workers with various different factors that might influence it -- including things like basic intelligence, education, race, family background, etc. What they found was pretty interesting. By a wide margin, the factor that correlated most closely to wage rates was a worker's ability to read, write, and speak English.
I suspect that one of the biggest problems today is that a person's formal education is becoming increasingly unreliable as a measure for prospective employers to use when making hiring decisions. I can tell you from firsthand experience that the quality of college graduates has declined considerably over the years.
"Returns on capital" means it goes to the CEOs and their option plans, not the stockholders.
Well, when my husband gets his yearly compensation report (i.e. what kind of raise he's getting), the compensation package always includes other things that we don't actually see in his paycheck, like insurance coverage (health and life), retirement plan, etc.
IMHO, in some white collar jobs, the actual "pay" has not increased as much because the companies cost of the "perks" has risen, insurance, being the main thing that has eaten away at rising salaries.
As a Carpenter, my job hasn't been outsourced. I took a 14.6% salary increase last year and now inflation, fuel costs and taxes have zeroed that out. :-(
Boy where have you been - exactly the opposite has happened. Companies are dropping health and retirement plans all over the place.
In a few years, the only people left with health and retirement plans will be government workers and CEOs.
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