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.
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.
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.
Jordan Weissmann has a piece in The Atlantic entitled “Who’s Really to Blame for the Wal-Mart Strikes? The American Consumer.”
While I will admit that the demands of the American consumer being partly responsible for the wage scale paid by Wal-Mart, I frankly see no consumer liability in that responsibility. Wal-Mart saw a need, constructed a model and has successfully fulfilled that demand. And last I checked, no one has twisted anyone’s arm or marched them into Wal-Mart and made them take a job.
The American consumer’s role? It is like us saying “you can have open borders or you can have a welfare state, but you can’t have both”. You can demand the lowest prices or you can demand “mom and pop” be saved and pay their workers more (but then you have to commit to voluntarily doing business and paying higher prices) but you can’t have both.
Weissmann is essentially claiming that the consumer is to blame for impending strikes by demanding lower prices. Lower prices mean lower pay and because Wal-Mart isn’t paying a “living wage”, it’s employees are striking. Again it’s a part of the left’s disingenuous”fairness” argument.
But by now, that low-price, low-wage model has become the industry standard among discount retailers, or at least close to it. The median retail worker earns $14.42 an hour, but at big box chains, the pay is significantly lower (the notable exception being Costco, which commendably pays its employees a living wage). Walmart, for instance, says it pays full time sales associates $11.75 an hour on average. But independent analysis peg the figure much lower, closer to $9. According to IBISWorld, that puts it a bit behind companies like Home Depot and Lowes, but ahead of its nearest competitor, Target, which has managed to put a more fashionable face on the same abysmal pay for its workers.
First a “living wage” is different for different people. If husband and wife are both working, the one working at Wal-Mart may be supplementing the higher wage of the other spouse. Who is to say what the Wal-Mart employee earns isn’t sufficient to live quite well on? If it is a teenager living at home, what’s a “living wage” to him or her? What, in fact, the Weissmann’s of the world are claiming is that any wage paid to anyone should be sufficient to “live on” based on whatever arbitrary standard they choose to apply. My reaction? None of your business – everyone goes to work and accepts the wages they do for their particular reasons. If they aren’t satisfied, then they can leave.
That brings us to point two, if you don’t like the pay at Wal-Mart, seek a job at another employer. I doubt that most “big box” companies look at their employees as permanent. Wal-Mart and others are, for many, a stop on the way (for experience) to higher paying jobs. If it’s not, if it is all someone is qualified to do, then that’s their problem, not Wal-Mart’s and not the shopping public’s. My suggestion is to seek out further training or schooling elsewhere. But it isn’t the job of the public to subsidize your wages just because you think you’re worth more than you really are.
Wal-Mart doesn’t exist to pay a “living wage”, whatever that is. It exists to serve it’s customers and turn a profit. It is that profit that allows them to provide what is demanded by their customers and to pay their employees. If wages are too low, workers will likely look to an alternative for employment. Yet, somehow, Wal-Mart remains fairly consistently fully staffed.
Like it or not (and the complainers usually don’t) that’s the model. It works. It provides consumers what they demand.
But that’s not what the fair police want, you see. And that’s where you see this sort of an argument:
There are many reasons why pay in retail is often paltry. Among them, it’s a low-skill industry with high turnover and a lot young workers. But the sector’s utter lack of of union presence certainly plays role. And for that, we can thank both Wal-Mart and Washington. From its earliest days, Wal-Mart has taken fiercely antagonistic stance towards organized labor, keeping its stores union free by using every ounce of leverage Congress has given employers — so much so that, in 2007, Human Rights Watch called the company “‘a case study in what is wrong with U.S. labor laws.”
In essence what Weissmann is arguing is workers should be paid more than their worth in a competitive labor market (low-skilled young workers with little experience). It’s a matter of “social justice” – that nebulous term used to justify intrusion into markets because they “care” (with your money, usually). And their go-to vehicle for achieving this “social justice” and upsetting a business model that favors the consumer is the union. Other than grow fat and demanding, that’s what unions are there to do.
See Hostess and GM for how that usually ends up.
But to his point, there’s a reason Wal-Mart is “fiercely antagonistic” toward unions. That’s because unions would wreck the model they’ve so painstakingly put together over the years, the one which their customers demand. Customers don’t show up there because they love Wal-Mart. They show up because they get more for their hard earned money.
Unionize, demand wage and pension increases and all the other concessions that put GM in the poor house and Hostess out of business and you’ll find one thing to be true – Wal-Mart’s customers will go to Target. Or Kohls or some other “big box” retailer.
But they’re not going to pay higher prices. They like the model. It works for them and their situation. And they will seek out the next best alternative when and if they see prices go up at Wal-Mart.
So, perhaps it is time for those like Weissmann to figure out what Wal-Mart is – it is a store that offers deep discounts on thousands of items that its customers demand. Oh, and by the way, it also has employees who are paid according to that customer driven model. The workers have choices, if they’ve prepared themselves – work at Wal-Mart to gain experience and move on, or go do something else. For those who haven’t prepared themselves for anything else, it isn’t the customer’s job to subsidize their wages just because they believe they should get more even if they haven’t earned it.
But for those who can’t let this go, I have an idea. Each and every Wal-Mart store ought to establish at least one check-out line which is for those who want to pay the highest retail price found for the items they’re going to purchase. Wal-Mart could research that, have the cash register price the items according to that research and at the end the Wal-Mart associate could say to the person, “and you over-paid by $53.00, have a nice day.”
Wal-Mart would then promise to take the difference between their prices and the premium prices and apply it to the pay of all Wal-Mart associates.
How’s that for fair? And people in that line wouldn’t have to feel like hypocrites when they diss Wal-Mart for it’s presumably low pay while they continue to buy at the store.
Of course, that particular line would likely to look like something out of a Halloween display, all covered in cob-webs and the like.
Reading over the CBO’s analysis and comparison of private sector wages vs. federal government wages revealed some interesting things. The CBO broke down its comparison by education – or lack there of.
It seems that if you have a college degree or a professional degree, pay is about equal in the private and government sectors (although benefits are greater if you work for government). If you have a PhD, you’re much better off in the private sector.
But, if you’re a high school grad or college drop out, the Fed is for you.
Federal civilian workers with no more than a high school education earned about 21 percent more, on average, than similar workers in the private sector.
Average benefits for federal workers with no more than a high school diploma were 72 percent higher than for their private-sector counterparts.
Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.
Now I note this for a very simple reason. Who do you think is attracted to federal service vs. who do you think might seek employment first outside of federal service? And what effect do these inflated wages and benefits have on the labor market?
It is sort of like the subsidy/tax question. If you subsidized something you get what? More of it. If you tax it you usually get what? Less of it.
Well, if you pay wages and benefits far above the market to a certain segment of the population, who are you likely to attract?
And are we necessarily best served by that?
I don’t have anything against high school grads. I’m simply illustrating a point. This isn’t a market driven phenomenon. It is, however, something that will effect labor markets. It is sort of the opposite of the Medicare problem in the health profession. Medicare artificially bids down the price of health care to the point that as it continues to lower its payments, more and more health care providers refuse to take Medicare patients.
In this case we have government artificially bidding up the price of labor with arbitrary wage, benefit and total compensation numbers (they’re obviously not tied to private market compensation except somewhat in the case of college or professional degrees). And, of course, you have to factor in government unions as big reason for this.
What it means is government will take potential workers from the market that might have worked in the private sector at a lower wage. Now, certainly, there’s no shortage of labor at this point in our economy, however, you get the point. If we were in such a place (you know, like a recovery with a rapidly expanding private sector?) then you’d have government bidding up wages artificially – and we all know what that means to consumers. Higher prices. And to potential employers – higher wages and benefits.
The result – well, probably reduced hiring. Because any good business is going to do a cost-benefit analysis to determine whether the job they’re considering adding is worth the price they’ll have to pay in wages and benefits. This is probably one of many factors, at this time, which point to the “no” button.
It is this sort of intrusion in markets (in hundreds of ways driven by government) that distorts them, artificially moves the equilibrium point and causes prices to rise and unemployment to stay high.