Who’s the Culprit for Why American Wage Growth Is Going Nowhere?

Art by Lily Padula

Good times bring good pay, right? Not always. US wages have not grown much over the past half century and, despite the current 11-year economic expansion, haven’t shown much pep lately either. What’s to blame?

Various economists point to causes that range from globalization that led to outsourcing good jobs abroad to automation that laid off workers at home, the dwindling of unions, and the explosion of health care costs.

The probable truth is that they’re all culprits in this drama, as well as some other forces, all of which have led to stagnant or slow-growing real incomes for many Americans since the 1970s. “Whenever you have an important economic question,” noted Efraim Benmelech, professor of finance at Northwestern’s Kellogg School of Management, in a research paper, “it is unlikely there will be only one explanation.”

So the answer is like the identity of the murderer in Agatha Christie’s classic mystery tale, Murder on the Orient Express (spoiler alert). It was all the passengers on the train, acting in concert with sharp knives. The victim was a very bad guy.

The one thread that binds all the causes of stunted wage growth together is the changing nature of the world’s economy since the 1970s. Perhaps if offshoring, automation, and the rest had never occurred, people would be better off financially. On the other hand, maybe such a lack of change would have spoiled the fruits of modern living.

The yin and yang of this: A lot of consumer goods made cheaply overseas cost Americans less than if they were still produced at home. The downside has been brutal layoffs and factory closings in the US industrial base. And automation? Who wants to go back to waiting in long teller lines at banks? The advent of the ATM has been a huge time savings for bank customers, albeit no friend to retail bank employees’ livelihoods.

The way strapped Americans have made up the difference between their means and their needs is credit, an easy solution amid current low interest rates. While high employment growth—225,000 jobs added last month—has kept individual spending healthy lately, consumer debt has burgeoned, topping $14 trillion.

The Path to Punk Pay

Here’s how we got where we are today. At first, appearances are deceiving. In nominal (that is, not inflation-adjusted) terms, wages have grown smartly. Average wages for nonsupervisory workers rose to $28.44 per hour in January from $2.50 in 1964, or $20.62 back then in present-day dollars. Still, as a Pew Research Center study indicates, after accounting for inflation, that’s a gain of just 0.6% yearly.

The factors that have affected wages have come in stages. High inflation decimated pay gains in the 1970s and early 1980s; then slow productivity increases kicked in during the 1970s, 1980s, and early 1990s. Offshoring and automation arrived in the 2000s. And next came the Great Recession, which tossed millions out of work and rendered raises a rare luxury in many workplaces.

Look at how wage growth has done since right before the 2007-09 recession. According to the Federal Reserve Bank of Atlanta, inflation-adjusted gains slumped to less than 0.5% through the middle of the last decade, from around 1.5% before the recession slammed the country.

Except for a rough patch in 2015, when the economy flirted with another recession, gross domestic product has grown at a steady, if uninspiring, clip of around 2% yearly. That finally has led to robust hiring in the past few years, and an unemployment rate of 3.6%, down from 10% in post-recession 2010. Vexingly, however, pay hasn’t kept pace.

Under conventional economics thinking, this shouldn’t be happening. The celebrated Phillips curve posited an inverse relationship between unemployment and wages. When lots of people are out of work, the theory goes, employers need not pay as much for their services. And, this thinking holds, the opposite is true, too: During good times, employers must enhance wages to attract and retain workers, who have ample opportunities elsewhere. 

A.W. Phillips, an economist at the London School of Economics, came up with the jobs-pay trade-off in a 1958 paper, and, indeed, this was the status quo that had prevailed up to then. What the academic’s curve didn’t consider was the advent of spiraling inflation. The 1970s experienced the toxic pairing called stagflation, with high unemployment and high inflation battering the workforce. Thus, while the Phillips curve today retains some relevance—as the recovery strengthened post-2009 and hiring accelerated, wages did pick up to a degree—the concept has its limits.

The Ground Shifts

Things have progressed in society over the past half century, to be sure, despite crimped wage growth. And some say conventional metrics leave them out of people’s quality-of-life equations. Better and bigger dwellings are one example. Houses in the 21^st century are more spacious than before—those with two or more rooms per person are up by a third from 1972, and central air conditioning is three times as common.

Such improvements can come at a cost, though: Homes are much more costly and, absent decent paychecks, home buyers must turn to big mortgages. Upshot: the swelling debt load. Onerous debts, particularly for housing, triggered the mortgage crash that spawned the Great Recession.

Yes, some advances are out-and-out affordable wins for consumers. Take technology. In real terms, the many types of computers, from smartwatches to laptops, have dropped in price, and delivered better and better information. And those enhancements haven’t been captured in economic statistics.

“We shop from our armchairs and work for companies thousands of miles away,” wrote former Senate Banking Committee Chairman Phil Gramm and John Early, a former assistant commissioner at the US Bureau of Labor Statistics, in a Wall Street Journal op-ed last year. Yet no inflation gauge, they noted, can measure “the value embodied in … miracle innovations.”

All true. And those cheaper quality of life upgrades are a blessing in light of the limited income growth that many people are encountering. The trends that have yielded this compensation calamity are like a swarm of bees:

Work environment transformed. The China syndrome has been US labor’s nemesis for some time. Over 20 years, Chinese imports have been responsible for the loss of 3.7 million US jobs, with three-quarters of them in the industrial sector, says the Alliance for American Manufacturing.

The long-lamented hollowing out of the American industrial workforce is undeniable, and with it, the ebbing of union representation. Manufacturing employment, at 13 million last year, has shrunk almost in half from its peak in 1979.  The same math prevails for union membership, which is now at 10% of the labor force, down from 20% four decades ago.

Manufacturing and union jobs just pay better than others. Service jobs, which are increasing, are on the low end of the pay scale. Industrial positions pay 13% more than other types of employment, says the Economic Policy Institute (EPI), a liberal-leaning think tank. What’s more, the manufacturing wage average is held down by an influx of temporary workers, who make less; they comprised 11% of industrial jobs in 2015, the last year measured, up from 2% a quarter century before.

Given the trade tensions between the US and China, there’s no telling what the future will bring in terms of an American job drain offshore. But continued automation should take a further toll on the nation’s workers, and their pay. In fact, several studies find that automation has been a bigger job killer than competition from inexpensive foreign labor.

The Brookings Institution calculates that as much as a quarter of the country’s current jobs are at risk in coming decades from robots. That’s in factories, of course, as well as office administration, food prep, and transportation (think driverless delivery trucks).

Health hex. Some 30% of employee compensation is benefits, whether corporate 401(k) contributions, commuting subsidies, or health care. The health part of the mix is the biggest. By the reckoning of EPI, workers’ health insurance premiums are rising much faster than their pay, and so are out-of-pocket expenses. Americans spent 17.9% of GDP on medical care in 2017, the most recent year measured. That’s more than double the share in 1979.

Timidity. No one has any stats for this notion, but it makes sense: In the wake of the Great Recession, American workers underwent a behavioral change. The economic downturn, the worst since the Great Depression, was very sudden and scary, and the mass layoffs that ensued rattled confidence. Workers became leery about asking for raises, for fear of being labeled malcontents and losing their jobs. Hence, they chose to sacrifice their earnings power for stability.

Baby boom bust. The huge generation born between 1946 and 1964 is moving onto the retirement rolls, at the rate of 10,000 per day. The boomers tend to be at the upper range of the payroll, and they are replaced by lower-earning millennials. That has the effect of bringing average pay down.

It’s better at the top. Income inequality is a term that’s thrown around a lot, particularly on the political campaign trail. For good reason. Wage stagnation is not a concern for those at the top of the financial ladder. As you climb down the rungs, the problem becomes more painful.

For workers in the top one-tenth of the income spectrum, median real wages rose from 1979 to 2018 by 36.4% for men and 66.7% for women (coming off a lower base and propelled by greater education attainment than before), a Congressional Research Service study finds. Middle-wage workers, at the 50^th percentile, didn’t do as well: down 5.6% for men and up 25.7% for women. And at the bottom tenth? Wipe out. Males lost 13.3% and females inched up a mere 4.8%.

All in all, this isn’t lovely news for a lot of workers. And, as they face the future, odds are it won’t get any nicer.

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