Why America's Wages Are Barely Rising

Aug 3, 2017
Originally published on August 4, 2017 8:58 am

Americans have been waiting for a solid pay raise for years. Maybe there's good news awaiting them as the country employs more people.

The U.S. economic recovery has gone on for eight long years, and the unemployment rate is at a low 4.4 percent. But wage gains have barely budged.

That's got economists scratching their heads.

Andrew Chamberlain, the chief economist at the jobs and recruiting company Glassdoor, says even as the unemployment rate fell to a 16-year low recently, wage growth has slowed. The company's own data for July confirm that. He says it shows "very sluggish growth, the slowest pace we've recorded in about three years and it's the sixth straight month that pay growth has declined."

The Labor Department's numbers aren't quite that bad, but they do show wage growth averaging 2.5 percent in the past four months after peaking at 2.9 percent in December. (The latest figures will be part of Friday's employment report for July.) Chamberlain says wage growth at this stage of an economic recovery should be close to 3.5 percent.

He says there are a number of theories about why this hasn't happened. One is that many young, inexperienced workers are entering the labor force. He says they "are replacing baby boomers who are leaving near their peak earning years."

Those young workers are paid much less and are dragging down the earnings growth for the nation as a whole.

Chamberlain says there's another factor in the disconnect: The low unemployment rate doesn't reflect the fact that a large number of prime-age workers remain outside the labor force, so they're not counted as unemployed. These are people between ages 25 and 54 — the prime working ages — who are not looking for a job, but might if the conditions were right, he says.

"Sometimes these are stay-at-home parents," he says. "Sometimes these are people with an injury that has kept them out of the labor force, but for the right price, the right offer, it would pull them back in."

About 22 percent of this prime-age group remain on the sidelines of the labor force. That number was lower before the Great Recession, Chamberlain says, and a good-paying job is the best way to lure them back.

People who are out of the labor force face a trade-off. Chamberlain says they ask themselves, "Is it worth it, when I factor in all taxes and benefits (and the cost of day care). Is it worth it for me [to] take a full-time job or not?" He says rapid wage growth can tip the balance.

Economist Dean Baker of the Center for Policy Research agrees. He often sees reports of employers complaining they can't find enough workers and, he says, "I look at it and go, well, have you tried raising wages?"

Chamberlain says this prime age group has been slowly returning to the workforce as wages have slowly risen. But, he says, at the current pace it will take at least six months or more to get their participation to levels seen before the Great Recession.

Baker says there's a danger that Federal Reserve interest rate hikes could slow the economy before enough of these workers return. For the moment, he says, "it looks like they [the Fed] are going to put off further rate hikes." That's good, he says, because it will allow more growth that can attract more of these people back to work.

There are other reasons that wages aren't rising, says Baker, including a decline in unionization and slow productivity growth. But both of those require longer-term solutions.

And, of course, the hourly wage numbers in the employment report are an average. If you live in Boston, San Francisco or Seattle, chances are wages are rising much faster than the average for you. And if you're in health care technology, wages are rising rapidly. If you're a buyer for a retail outlet, you're not so lucky.

Copyright 2017 NPR. To see more, visit http://www.npr.org/.

AUDIE CORNISH, HOST:

Many Americans have been waiting years for a solid pay raise. Tomorrow's monthly jobs report could provide some encouragement. Many economists are expecting it will show another drop in the unemployment rate. Now, that should boost wage growth, but as NPR's John Ydstie reports, that's far from certain in the current economy.

JOHN YDSTIE, BYLINE: The U.S. economic recovery has gone on for eight years now. The unemployment rate is at 4.4 percent. That's very low. And there are near record numbers of job openings. Normally that scenario would have employers boosting wages to attract workers, but wage gains have been very sluggish. That's got economists scratching their heads. Andrew Chamberlain is chief economist at Glassdoor, an online employment information and recruiting service. He says though the unemployment rate is near a 16-year low, his company's data indicates that wage growth is slowing.

ANDREW CHAMBERLAIN: Very sluggish growth, the slowest pace we've recorded in about three years. And it's the sixth straight month that that pay growth has declined.

YDSTIE: The Labor Department's numbers also show yearly wage growth slowing to just 2-and-a-half percent in recent months. Chamberlain says at this stage in an economic recovery, it should be 3-and-a-half percent. There are a number of theories about why that hasn't happened. Chamberlain says one important factor is that a tide of young, inexperienced workers is entering the labor force.

CHAMBERLAIN: Younger workers who are coming into the workforce that are replacing baby boomers who are leaving near their peak earning years.

YDSTIE: Those young workers are paid much less, and they're dragging down the average earnings growth for the nation as a whole. Chamberlain says there's another factor in the disconnect. The low unemployment rate doesn't count a large number of working-age people who are currently on the sidelines. These are people between the ages 25 to 54, the prime working years, who aren't employed and aren't looking for a job. But Chamberlain says many would go to work if the conditions were right.

CHAMBERLAIN: Sometimes these are stay-at-home parents. Sometimes these are people with an injury that has kept them out of the labor force. But for the right price, the right offer, it would pull them back in.

YDSTIE: About 22 percent of this prime age group remain on the sidelines of the U.S. labor force. That number was lower before the Great Recession, and Chamberlain says a good-paying job is the best way to lure them back.

CHAMBERLAIN: People who are out of the labor force are weighing the tradeoff between - you know, is it worth it? When I factor in all taxes and benefits, is it worth it for me to pay for daycare, to go take a full time job or not? Wage growth definitely pulls people back in - no question.

YDSTIE: Economist Dean Baker of the Center for Policy Research says he often sees stories in the newspaper with employers complaining that they can't find enough workers.

DEAN BAKER: Well, you know, I'd look at and go, well, have you tried raising wages?

YDSTIE: Chamberlain says these people on the sidelines have been slowly returning to the workforce as wages have slowly risen. But he says at the current pace, it will take six months or more to get their participation back to levels seen before the Great Recession. Baker says there's a danger that Federal Reserve interest rate hikes could slow this process of bringing people back into the workforce. Fortunately, he says, it looks like the Fed has put off further rate hikes at least for the time being.

BAKER: That will allow the economy more room to grow, the labor market to tighten further. That will presumably mean more wage growth.

YDSTIE: There are other reasons wages aren't rising, says Baker. A decline in unionization and slow productivity growth are among them. Both of those require longer-term solutions. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.