Hourly Pay in U.S. Not Keeping Pace With Price Rises
The amount of money workers receive in their paychecks is failing to keep up with inflation. Though wages should recover if businesses continue to hire, three years of job losses have left a large worker surplus. “There’s too much slack in the labor market to generate any pressure on wage growth,” said Jared Bernstein, an economist at the Economic Policy Institute, a liberal research institution based in Washington. “We are going to need a much lower unemployment rate.” He noted that at 5.6 percent, the national unemployment rate is still back at the same level as at the end of the recession in November 2001.
Even though the economy has been adding hundreds of thousands of jobs almost every month this year, stagnant wages could put a dent in the prospects for economic growth, some economists say. If incomes continue to lag behind the increase in prices, it may hinder the ability of ordinary workers to spend money at a healthy clip, undermining one of the pillars of the expansion so far.
On Friday, the Bureau of Labor Statistics reported that hourly earnings of production workers – nonmanagement workers ranging from nurses and teachers to hamburger flippers and assembly-line workers – fell 1.1 percent in June, after accounting for inflation. The June drop, the steepest decline since the depths of recession in mid-1991, came after a 0.8 percent fall in real hourly earnings in May.
Coming on top of a 12-minute drop in the average workweek, the decline in the hourly rate last month cut deeply into workers’ pay. In June, production workers took home $525.84 a week, on average. After accounting for inflation, this is about $8 less than they were pocketing last January, and is the lowest level of weekly pay since October 2001. On its own, the decline in workers’ wages is unlikely to derail the recovery. Though they account for some 80 percent of the work force, they contribute much less to spending. Mark M. Zandi, chief economist at Economy.com, a research firm, noted that households in the bottom half of income distribution account for only one-third of consumer spending.
Nonetheless, coming after the bonanza of the second half of the 1990’s, the first period of sustained real wage growth since the 1970’s, the current slide in earnings is a big blow for the lower middle class. Moreover, the absence of lower income households could also weigh on overall economic growth – putting a lid on the mass market and skewing consumption toward high-end products. “There’s a bit of a dichotomy,” said Ethan S. Harris, chief economist at Lehman Brothers. “Joe Six-Pack is under a lot of pressure. He got a lousy raise; he’s paying more for gasoline and milk. He’s not doing that great. But proprietors’ income is up. Profits are up. Home values are up. Middle-income and upper-income people are looking pretty good.”
So, people earning hourly wages are falling behind high skill workers in their buying power. Philip Greenspun offers an interesting contrast between the jobs requiring high and low IQs. Ruy Texuira, on the other hand, thinks it’s President Bush’s fault, for reasons he doesn’t specify.
Steve Antler points us to Annenberg’s Fact Check, which paints a somewhat different picture. For one thing, the number of people working in the “bad” jobs is declining while those working in “good” jobs is growing.
A new set of numbers from the Bureau of Labor Statistics actually shows solid growth in employment in relatively higher -paying occupations including construction workers, health-care professionals, business managers, and teachers, and virtually no growth at all in relatively lower-paying occupations including office clerks and assembly-line workers. It’s the most detailed breakdown yet — looking at 154 different job and industry groupings.
Even after adjusting for inflation — including the rising price of gasoline –those earnings are up just over 1% since January 2001, despite the recession and the initially slow recovery. These statistics come from a different BLS survey and cover a somewhat different time period than the figures cited by Kerry. They are going to be controversial and won’t settle the good jobs/bad jobs argument. There’s also plenty of evidence that large numbers of Americans are indeed worse off now than they were before 2001, including the fact that more than 1 million Americans have been out of work for a full year or more.
So, the problem isn’t so much the buying power of the employed but the people whose jobs went away permanently, eaten by the business cycle.
Also, a rather obvious point:
The very recent decline in inflation-adjusted earnings has more to do with rising oil prices than with any change in job quality. The Consumer Price Index has risen 2.3% since August, but with energy prices taken out it has risen only 1.6%. So, if energy prices hadn’t spiked, inflation-adjusted average weekly earnings wouldn’t have declined.
Higher oil prices are a double whammy, in that they not only hit consumers directly at the gas pump but indirectly through increased production and distribution costs for virtually every product they buy. Traditionally, though, these spikes have been temporary, as increased prices cause companies (and countries) to begin pumping more oil to take advantge of the market. That won’t necessarily happen this time, as part of the increase in price is the rising standard of living–and thus demand for petroleum products–in the developing world, most notably China.
UPDATE (1945): Apropos this story, Kevin Drum has started a contest:
[A] prize for the least laughable explanation for why CEO pay has gone up 7x since 1980 based on supply and demand. At a minimum, winning entries should explain the following:
* Why the supply of CEOs has decreased.
* Why the demand for CEOs has increased.
* Why the elasticity of the CEO demand curve is apparently steeper than for any other commodity on the planet.
Fair questions beyond my knowledge of economic theory. My guess is that the reason is the same that pay for NFL quarterbacks and NBA benchwarmers has skyrocketed, despite league expansions, well beyond that of beer vendors in the venues where these athletes play. (This denies the premise of bullet 3.) I honestly don’t understand that phenomenon either, just that there seems to be a trend.