Rampell: Why wages haven’t grown with the economy

By Catherine Rampell

Dude, where’s my pay raise?

The economic recovery is coming up on its ninth birthday. Unemployment has fallen steadily and relatively consistently during both the Obama years and now President Trump’s tenure, down to 3.9 percent in April. That’s the lowest level since 2000.

Meanwhile, lots of other measures suggest firms are having trouble finding workers. There are 1.1 unemployed persons per job opening, tied with the lowest ratio on record, per the Bureau of Labor Statistics. Half of firms say they can’t find qualified workers, according to the National Federation of Independent Business’ latest survey of small- and medium-sized businesses.

In theory, all this means employers should have to offer much higher wages to attract and retain talent. Somehow, though, reality isn’t cooperating with the theory.

Raises have been disappointing: Before inflation, hourly pay was up just 2.6 percent in April compared with a year earlier. Some other measures of wage growth, such as the quarterly Employment Cost Index, are stronger but still not great.

Wages are a “lagging” indicator, meaning raises generally materialize late in the business cycle. So maybe we’re all a hop, skip and a jump away from a generous pay hike. Particularly because inflation seems to be finally picking up. Maybe workers will see prices rising and put more pressure on employers to top off their paychecks.

But truly, the lack of significant raises this far into one of the longest expansions on record remains a puzzle. Let’s go through some possible explanations.

First, there might be more “slack” in the economy than the headline unemployment rate suggests. There are still a lot of working-age people sitting on the sidelines, not technically counted as unemployed, even if they might be willing to take a job should one come along. If, in fact, we’re close to exhausting the supply of those would-be workers, we may see more upward pressure on wages.

Relatedly, some economists — including at the Federal Reserve Bank of San Francisco — have argued that demographic changes may be affecting the composition of people with jobs, and therefore skewing overall pay numbers.

Baby boomers are retiring en masse, and they tend to earn more than their younger, less experienced, whippersnapping counterparts. Meanwhile, the people entering or re-entering the labor force are likely to be disproportionately younger, less experienced or otherwise lacking in much leverage (especially those who haven’t worked in a while).

In other words, both the kinds of people leaving the job market, and those coming into it, may be weighing on average pay levels nationwide.

Another possibility is that firms are using other tactics to attract workers, such as bonuses or contributions to pay off student-loan debt — i.e., one-of costs, rather than permanent wage or salary hikes.

There are colorful anecdotes about signing bonuses, for instance, in blue-collar occupations where they haven’t been standard practice. Moreover, Labor Department data suggest that nonproduction bonuses (a category that includes holiday bonuses, signing or retention bonuses, and profit-sharing) have been growing as a share of overall compensation for several decades.

In 1991, for instance, 0.8 percent of a worker’s total compensation on average came from these nonproduction bonuses; by the end of 2017, the share had risen to 2.3 percent. So, still a small share, but perhaps a reflection of a broader trend away from fixed, predictable salaries and toward variable compensation.

It’s not hard to understand why some firms prefer this arrangement: It gives them more flexibility. They’re not stuck with as large a wage bill if the economy sours, particularly if low inflation limits their ability to “inflate away” some recurring salary and wage costs. But of course this development is not good for workers, who bear more risk in a bad economy.

By the way, speaking of non-wage forms of compensation: Employer-sponsored health premiums, often blamed for gobbling up salary hikes, have been growing (relatively) slowly in recent years.

Other long-term changes in the economy affecting workers’ ability to demand higher pay are worth looking at, though.

Unionization has declined, and outsourcing and subcontracting have increased. Noncompete clauses are more common. Labor productivity growth has been slow. Some economists have recently argued that rising employer concentration is to blame for wage stagnation. (For example, you might have just one big, merged hospital in town now, rather than two competing hospitals to play off one another.) The methodology underlying this thesis has long been controversial, however.

Whatever the cause, for years now, it has often looked as if pay raises were right around the corner. Instead, around the corner has been yet another corner. Let’s hope workers are able to escape this M.C. Escher painting soon.

Catherine Rampell’s email address is crampell@washpost.com. Follow her on Twitter, @crampell.