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December 19, 2004

Recent Wage Trends

Jared Bernstein writes:

EPI: As of last month, the economic recovery that officially began in November 2001 was three years old... hourly earnings (adjusted for inflation) fell 1.3% over the past year and are now at about the same level now as they were when the recovery began.... [E]ven though the economy began to add some jobs last year, the rate of growth has been too slow and inconsistent to absorb the slack that remains in the job market.  Under such conditions, employers are less compelled to pass along gains in profits or productivity onto workers’ wages.... [T]he general trend over the past year has been negative, with the buying power of the hourly wage down $0.21 (or 1.3%) this year.  Thus, three years into an economic recovery that has seen robust profits and productivity growth, the hourly wage of most workers has not advanced at all...

I do find this almost impossible to believe: I can accept that--in spite of the moderate unemployment rate--the labor market is weak. But this weak? Weak enough to combine 3-4% productivity growth with no real wage growth year after year? It's tremendously disturbing.

Posted by DeLong at December 19, 2004 07:10 AM

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I think one has to assume that the ready availability of consumer credit has played a part in restraining pressure for wage growth.

We are probably look at one hell of an adjustment after Greenspan runs out of assets to inflate.

Posted by: Dave L at December 19, 2004 08:08 AM

Hell, I believe it and yes, it is disturbing. I bet employers are still getting hundreds if not thousands of applications for every job, and they righly assume there's still a huge pool of unemployed people. Why raise wages if there's hundreds of people willing to do it at the same rate? It'd be interesting to see a survey of just how many applications they're getting for jobs these days.

Posted by: Theresa at December 19, 2004 08:16 AM

Monopsony in motion...

Posted by: Atrios at December 19, 2004 08:26 AM

You have to wonder if our economic figures, especially productivity, are simply wrong. Suppose the national accounts figures are underestimating the amount of inflation. What would you expect to see? You would expect to see apparent GDP growth without any tightening in labor markets, _and_ you'd expect to see the value of the dollar fall against foreign currencies. What do we actually see? Apparent GDP growth without any tightening in labor markets, and the value of the dollar falling against foreign currencies.

Posted by: Walt Pohl at December 19, 2004 08:29 AM

Is the hourly earnings just wages, or does it capture total compensation?

If the former, I'd propose that increases in total compensation are being sucked up by increases in medical insurance premiums rather than showing up in the paycheck.

Posted by: Ottnott at December 19, 2004 08:31 AM

On the bright side, top-five executives across the whole of the Fortune 500 have to be looking at those numbers and salivating. That's 2,500 highly compensated employees whose children's children will be inheriting.

All hail the new ruling class.

Posted by: wcw at December 19, 2004 08:31 AM

If the supply of labor in the form of imports and immigrants goes up faster than the demand for labor, why should wages rise?
I lived in the Bay Area of California till two months ago, and the quantity and qualifications of immigrants was going up on a yearly basis. We aren't getting just wetbacks any more. It's not just the blue collar and pink collar jobs that are losing the ability to demand better wages.
If we are importing 500 billion dollars worth of stuff every year that we are not paying for with exports that generate their own jobs, then that comes to millions more immigrants in equivalent job loss.
Factory jobs are ones that often require higher skills than burger flipping. Resource jobs are some of the highest paying jobs in America. The amount of copper, lead, and alloys we import in the form of electronics and automobiles, not to mention the oil and chemical industry jobs for the plastics...
No wonder that the wages of middle class people are finally going down because of immigration.

Posted by: wkwillis at December 19, 2004 08:38 AM

This is one reason why I do not believe job growth will be anywhere near the 1.6% Bush is forecasting for next year. The labor market is slack right now, and going to get worse. Witness all the mid-Q4 reports of major companies announcing big BIG layoffs for 2005. Add in rising interest rates and the maxing-out of consumer credit and the economic numbers start looking dangerous.

2005 is going to be an interesting year. The fantasy-based policies Bush put in place over the previous 4 years will begin bearing their poisonous fruit. Will the "grown-up" Republicans finally realize that they must intervene to stave off a national catastrophe?

Posted by: Derelict at December 19, 2004 09:10 AM

1.) The Bush economic team is getting exactly what they have been aiming for: an economic recovery, where all the gain goes to corporations and the very wealthy. This administration is all about the redistribution of income and wealth. We are looking at competence of a very high order, used in the service of bad ends.

2.) Walt Pohl is right: there's "hidden" inflation.

Posted by: Bruce Wilder at December 19, 2004 09:21 AM

Wkwillis: GDP (which excludes imports) is up, so imports can't be used to explain it. Immigration is a possible explanation, but only if either a) the average productivity of an immigrant is higher than the average productivity of an American (and either the difference in productivity or amount of immigration would have be gigantic to explain the effect) or b) the amount of off the books work by immigrants is increasing very quickly.

Posted by: Walt Pohl at December 19, 2004 09:26 AM

Why is slow wage growth surprising?

Rising productivity implies a decreased demand for labor to produce the same output.

If labor has the political power to force wage increases, then spending will rise and allow output to increase. This increased output keeps prices stable, and eventually leads to an increased demand for labor. This is called economic growth.

When labor does not have the political power to force wage increases, increased productivity results in smaller payrolls, less demand and a downward economic cycle.

Historically, the 1920s and 1930s were a period of great productivity growth, but until the New Deal labor could not capture its share of the increase, so the boom faltered and the economy collapsed. While I don't think we are going to have another Great Depression, after all, there is a huge government makework project in Iraq, we will be seeing a lot more economic news like this.

P.S. How do you insert paragraph breaks. Judging from the preview, blank lines, and do not insert them.

Posted by: kaleberg at December 19, 2004 09:30 AM

Would seem to be logical if the productivity increases are mainly due to outsourcing new jobs. Or possibility there is no actual productivity growth, just undocumented time on the part of workers, as has been suggested by others.

Posted by: Tim H. at December 19, 2004 09:45 AM

[Yet another piece of comment spam makes it through]

Posted by: *Sigh* at December 19, 2004 10:04 AM

Ummm... Walt.... GDP includes imports as a portion of Net Exports, which explains why Net Exports are negative.

Posted by: section321 at December 19, 2004 10:22 AM

The problem is not American weak labor market but weak American labor -- as in almost no bargaining power at all: 8.2% unionized in private sector -- thanks ultimately to our national "myth" of the self-reliant individual. In Europe where the ideology is all "victimization", with good reason considering their much more unbearable labor history in the 1800s, they have unions galore, no lack of bargaining power, thus keep up very nicely with productivity.

Got to educate American workers to what they are missing and then unionize them -- I believe the only practical way is by mandatory legislation, German style: we are starting almost from scratch as they were when they did it.

Denis Drew

Posted by: Denis Drew at December 19, 2004 10:33 AM

Oh, dear, how are you going to get through to those glassy eyed productive workers who go home to watch TV and drink beer? In Europe, the workers go out and talk to each other. Here they go in and hide from each other.

Posted by: Carol at December 19, 2004 10:50 AM

This leads me to a few thoughts.

1. The whole idea behind eliminating taxes on everything but income is that growth will be huge. Since they've already started this process, maybe they are on to something.

2. But then, if growth is going to be huge, it's going to start for the people at the top before anyone else, if recent trends can be taken into account. And if that's the case, the trickle down theory must be in play. If so, and if it's greater than I think it is, when exactly is it going to start doing something for people at the bottom and in the middle?

3. Now for an opposite thought: since the people at the top are doing so much better, shouldn't we shift a little more of the burden to them? I'm not saying have the marginal rates at 90%. I'm merely saying that, in light of the fact that some people are making so much more than everyone else, wouldn't it make sense to think they could give up a little more?

Posted by: Brian at December 19, 2004 10:51 AM

I am surprised that anyone is surprised. Ignoring the ideologues who now set national policy,it has been clear for some time that the benefits of productivity gains have gone almost exclusively to ownership in one form or another and not to workers. This does not auger well for the continuation of a democratic society. I keep waiting for some economist to face this reality and suggest some way to restore the balance. Unfortunately there don't seem to be any economists who do not worship at the feet of markets or remember Keynes "in the long run we are all dead".

Posted by: Sam Taylor at December 19, 2004 10:54 AM

Section321: Ooops, you're right. I blame the fact that it's Sunday, and 90% of my brain is devoted to football. Anyway, large amounts of imports can't be used to explain increases in GDP, since the impact on GDP is negative.

Posted by: Walt Pohl at December 19, 2004 11:13 AM

Walt Pohl hits the nail on the head. There is no economic recovery, because the figures are bogus. Were the inflation figures being calculated and/or reported correctly, we would see that me may be experiencing negative real growth. All the things I need (health care, food, energy, transportation costs, education for my children, etc.) have been rising dramatically over the last few years. So what if plasma TV screens have declined dramatically in price. I used to buy a cylindrical-shaped cup of yogurt for 75 cents. I'm still paying the same price, but the cup is now more conical than cyclindrical. But, according to the CPI, there's no inflation. Bollocks!

Posted by: oneangryslav at December 19, 2004 11:15 AM

The sluggish increase in wages is certainly disturbing. Is this happening only in the US, or is it worldwide phenomenon? What sectors of the economy have the worst wage growth? I share others skepticism of the official government figures on inflation. Everything I buy seems to be increasing in price expect digital electronics and clothing. But it would require some kind of large conspiracy to cook the books on inflation. Surely someone at BLS would have blown the whistle by now. Perhaps they use defective methodology. For example, the CPI basket of goods includes rents, but not residential real estate. So CPI does not capture the inflation we have seen over the last several years in housing. Indeed as some have pointed out, rents are actually declining.

Imported labor like the H1-b non-immigrant visa program does hold down wages because they are willing to work for less pay. If we were to shut down the H1-b and L1 programs I think we would certainly see an increase in wages in the IT sector where something like 9 in 10 new IT jobs goes to an non-immigrant visa holder.

I also agree that the decline in organized labor has hurt wage growth in the US. Certain groups, like the tech workers need to get over this idea that they are some kind of professional that doesn’t need to bargain collectively. But this will be a big fight. Look at how hard UC Berkeley fought against their TAs when they tried to organize. Big time liberals suddenly get very conservative when their own workers want to unionize. Look at how post docs are treated.

Posted by: A. Zarkov at December 19, 2004 12:15 PM

As a relatively recent grad out in the job market in Portland, Oregon--hell, yes, it's that weak. Admittedly, this is depressed Oregon.

Let me suggest that one contributing factor here is that we are starting to have a world labor market, and US "labor" prices are beginning a slide down to world levels.

Unite or starve?

Posted by: Randolph Fritz at December 19, 2004 12:20 PM

Walt Pohl: Yes, many salaried people are working "off the books" -- when their overtime and weekend work is not tracked, how can it be reported? So if somebody is reported at 40 hours, but instead of previously (hypothetically) 40 hours works 45-50 hours (and actually manages to generate additional output for that), that makes for some nice "productivity" growth. Of course there is a limit to that, as it can be considered doubtful whether you will get much output growth when going above 50 or 60 hours. But then there are jobs with a large part of mundane and non-creative work, so they should scale up to a large number of hours. And when those workers have done this for a while, the medical profession will be making some money from them.

Posted by: cm at December 19, 2004 05:40 PM

Walt Pohl wrote, "Suppose the national accounts figures are underestimating the amount of inflation."

I agree. Prime suspect: hedonistic and other new adjustments introduced in the 1990s, and their impact on the tech sector.

Posted by: liberal at December 20, 2004 06:25 AM

A. Zarkov wrote, "But it would require some kind of large conspiracy to cook the books on inflation. Surely someone at BLS would have blown the whistle by now. Perhaps they use defective methodology. For example, the CPI basket of goods includes rents, but not residential real estate."

In addition to the real estate issue, there's the pricing of computer and related hardware, with *extremely large* hedonistic adjustments. There's also some kind of substitution effect adjustment.

These things went into the numbers in the 1990s.

Posted by: liberal at December 20, 2004 06:39 AM