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April 12, 2005

Double Gurk!!

Steven Greenhouse reports on falling real wages in 2004. Why oh why are we still so far from full employment?

The New York Times > Business > Falling Fortunes of Wage Earners: Beginning in the mid-1990's, pay increases for most workers slowly but steadily outpaced the rate of inflation, improving the living standards for nearly all Americans. But an unexpected reversal last year in those gains has set off a vigorous debate among economists over whether the decline is just a temporary dip or portends a deeper shift that may cause the pay of average Americans to lag for years to come. Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade....

The problem is not with the jobs themselves. Most economists dismiss as overblown the widespread fear that the number of jobs will shrink in the United States because of foreign competition from China, India and other developing nations. But at the same time many of these economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off. 'We're in for a long period where inflation-adjusted wages will be under acute pressure,' said Stephen S. Roach of Morgan Stanley. 'That's a most unusual development in a period of high productivity growth. Normally, real wages track productivity.'

But some economists are more optimistic, saying that the wage sluggishness is temporary and that real wages have slipped only because a sudden spike in oil prices has briefly left workers behind the curve. These economists assert that wage stagnation will end soon, as normal growth brings a tighter labor market. 'What we're seeing now is not atypical; employers can't pay the wage bill to keep up with the oil price increase,' said Allan H. Meltzer, an economist at Carnegie Mellon University. 'I think the long-term trend will be that wages will right themselves and look like productivity growth on average.'... At a Sprint call center in North Carolina, 180 customer service representatives are well aware of how such forces are squeezing them. Their jobs have not migrated overseas, but the employees just concluded their most bruising battle ever over wages.... [M]any economists, liberal and conservative, are perplexed by two unusual trends. Wage growth has trailed far behind productivity growth over the last four years, and the share of national income going to employee compensation is low by historic standards.... The overall wage figures hide a split, with an elite group getting relatively large gains. In a study of census data, the Economic Policy Institute, a liberal research group, found that for the bottom 95 percent of workers, after-inflation wages were flat or down in 2004, but for the top 5 percent, wages rose by an average of 1 percent, with some gaining much more....

J. Bradford DeLong, an economist at the University of California, Berkeley, said that current wage patterns, while perhaps only temporary, did not conform to traditional economic explanations. 'You'd think that with the unemployment rate near 5 percent and productivity growth so strong, employers would be anxious to raise payrolls and would have plenty of headroom to raise wages,' he said. 'But they're not.' Since 2001, when the recovery began, productivity growth has averaged 4.1 percent a year; overall compensation - wages and benefits - has risen about one-third as fast, by 1.5 percent a year on average. By contrast, over the previous seven business cycles, productivity rose by 2.5 percent a year on average while compensation rose roughly three-fourths as fast, by 1.8 percent a year.

'The question is not whether corporations are seeking higher profits; the question is how come they're getting them to such a degree at the expense of compensation,' said Jared Bernstein, an economist with the Economic Policy Institute. 'I'm struck at how successful they've been at restraining labor costs.' Labor unions' declining bargaining power has given corporations a stronger hand to hold down wages, he argued, but more recent trends, including the emergence of Wal-Mart Stores as a central force in the economy, now play crucial roles, too.... Last year's double-digit rise in health costs helped squeeze wages as well; many companies also required employees to cover more of the premiums out of their own pay....

While agreeing that these factors are important, Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages. 'Globalization is going to make it harder for American workers to have the wage increases and the benefits that we might have expected,' he said....

From 1996 to 2001, wages grew strongly again because of an unusually low jobless rate, caused in part by the high-technology boom. In the late 1990's, the tight labor market pressured companies to give sizable raises to attract and retain workers even as a surge in productivity helped business afford them without substantially cutting into profits. Thomas A. Kochan, an economist at the Massachusetts Institute of Technology, said wages could once again rise, but only if there was especially robust economic growth. 'To produce real wage gains now, it takes sustaining a very tight labor market,' he said. 'Without that, we're going to continue to see what we're seeing now: abysmal growth in real wages.'

Posted by DeLong at April 12, 2005 11:59 AM