Free Markets, Free People

Stagnant wages, among other things, a result of the economic doldrums

That’s certainly one of the factors keeping GDP growth low.

Four years into the economic recovery, U.S. workers’ pay still isn’t even keeping up with inflation. The average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show.

Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth.

Not only that, but unemployment remains historically high years after the “recovery”. The question, however, is why wages are remaining stagnant. The WSJ cites three factors:

Economic growth remains sluggish, advancing at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%. That effectively has put a lid on inflation, which has been near or below the 2% level the Federal Reserve considers healthy for the economy. With demand for labor low, prices not rising fast and 11.5 million unemployed searching for work, employers aren’t under pressure to raise wages to retain or attract workers.

Emphasis mine. The Fed is happy with the inflation rate. And the administration, despite numerous claims to be focused like a laser beam on “j-0-b-s” has done little if anything to address unemployment or economic growth. Finally, given the uncertainty that regulation and new laws (such as ObamaCare) bring to the table, employers are even less likely to hire until the regulatory and legal dust settles and they have a much better idea of how both effect their business and industry.  It’s not about “pressure”.  It’s about a lack of incentive.

Secondly:

Businesses are changing how they manage payrolls. Economists at the Federal Reserve Bank of San Francisco in a recent paper said that, in the past, companies cut wages when the economy struggled and raised them amid expansions. But in the past three recessions since 1986—and especially the 2007-2009 downturn—companies minimized wage cuts and instead let workers go to keep remaining workers happy. As a result, to compensate for the wage cuts that never were made, businesses now may be capping wage growth. “As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels,” the researchers said.

Another point to make, again considering the unemployment rate, is that those working are glad to still have a job. And with the economy still struggling it is unlikely that many feel the time right to push for higher wages. In fact, it is a “buyers market” right now when it comes to labor. And it will remain one until we get into much higher growth percentages and the demand for labor begins to outstrip the supply. We’re not even close to that at this point.

Finally:

Globalization continues to pressure wages. Thanks to new technologies, Americans are increasingly competing with workers world-wide. “We are on a long-term adjustment, as China, in particular, but all developing countries, get their wages closer to ours,” said Richard Freeman, an economist at Harvard University. According to Boston Consulting Group, there will be only a roughly 10% cost difference between the U.S. and China in making products such as machinery, furniture and plastics by 2015.

Technology is also replacing workers in many industries. Automation is especially tough on low skilled workers. But again, given laws like ObamaCare, the incentive at work is to have fewer employees, not more. Businesses will automate where it makes sense and helps make a profit. It is also a means of closing that wage gap mentioned above, so it isn’t a trend that is likely to end anytime soon.

All of those factors and what I’ve mentioned in addition to them combine to make unemployment and wage growth both remain static. There simply aren’t any incentives at the moment to hire more people. Certainly not in GDP growth. Certainly not with the plethora of new regulations and laws.

In fact, as is mentioned in the article, at the moment there are only two paths to higher wages:

The only path to wage gains is through a stronger economy or an increase in demand for specialized skills.

The economy is moribund and has been for quite some time with GDP growth under 2% for the last three quarters.

That narrows the path to wage gains to a single one – developing specialized skills. It isn’t a path open to everyone, unfortunately, for a number of reasons.

So how could government help change all of that? Quite simply by getting out of the way – something it seems completely unable to comprehend or do.

And because of that, it continues to contribute negatively to the economic situation we endure.

~McQ

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11 Responses to Stagnant wages, among other things, a result of the economic doldrums

  • Why not raise the minimun wage by taxing the rich and then giving that money to workers in the form of a supplemental check to anyone making less than $15hr! In fact we should make everyone employed in oil, coal, or natural gas pay a penalty into this fund regardless of how much they make! We wouldn’t even have to start  a new governement agency as the IRS could handle this easily by just hiring a few new people. These new employees plus their retirement and benefit packages would be paid by a 25% sales tax on firearm ammunition. This can all be done without raising the defecit! OR the government could just get out of the way!

    • “benefit packages would be paid by a 25% sales tax on firearm ammunition.”
       
      Didn’t some clown representatives from the usual suspect states just propose a bill that would amount to a 50% tax on handguns and ammo?
      And….chuckle….they were serious man.
       
      That’s not to say I don’t take you seriously br’er rabbit   :)

      • http://www.govtrack.us/congress/bills/113/hr3018/text
         
        Sorry, my bad, it’s a mere 20% on the far-arms, 50% on the ammo.   (Far-arms is very expensive clubs without when they ain’t got no ammo).
         
        but it’s just on the importer/manufacturer so….it won’t affect us common citizens ya see, cause they’ll just absorb the cost without passin it on to tha consumers.
        That’s how markets work.

  • “The Fed is happy with the inflation rate.”
    The Fed is happy with the PUBLICIZED inflation rate. Perception is reality to Americans.
     
    Actual inflation, when you factor in food and energy, like it was done in the past…..its much higher.  That is another reason why wages are shrinking. The buying power of the dollar is shrinking ever faster.

  • As for the coming employment rate this week, it will be very good. They did just hire entire unions and other progressive groups to push ObamaCare. If you think they will not add those temp jobs into the report then you do not know them very well.

  • As capitalist, monetized economies rarely generate full employment it is unlikely a program as ambiguous as “government get out of the way” would be of much use.  The only way to generate real wage growth is to switch from our current reserve-army-of-the-unemployed policy to a tight labor market policy.  There’s no way to get around private sector liquidity preferences.

  • Real wages for men have been stagnant since 1973.