The modern worker’s dilemma: why are wages falling?

The modern worker’s dilemma: why are wages falling?

While the United States experiences renewed job and economic growth, wages continue to lag behind. Economists and policymakers are increasingly concerned that paychecks will shrink as corporate profits grow.

Despite lackluster job growth in December 2017, the U.S. economy is doing well. The economy is strengthening, as indicated by the 4.1% unemployment and 3.2% GDP growth rate over the last three quarters. However, macro-level growth is not translating into pay raises, frustrating American workers and policymakers alike.

The disconnect between economic growth and wage growth

The mismatch between wage and economic growth is not a new phenomenon. In fact, the disconnect began in the late 1970’s. According to a study by the Economic Policy Institute (EPI) published in 2013, middle-wage workers have seen their hourly earnings stagnate since 1979, increasing by only 0.2% annually. This is far below the 3.5% average annual rate of inflation for the same period. Low-wage workers have suffered even more, as their wages have dropped by 5% between 1979 and 2013.

Wage stagnation is a problem for broad swathes of the U.S. population, not just those workers without a post-secondary education. The EPI found that in 2013, young college graduates’ real hourly wages were lower than they were in the 1990’s. For comparison, the average real hourly wage of a young college graduate (regardless of gender) was $18.00 in 1998, while in 2013 it was $16.99.

However, manufacturing and production workers have been the worst affected group of American workers. Blue-collar manufacturing workers have seen their wages dropping by 4.4% from 2003 to 2013, a rate of decline three times that of the average U.S. worker. There are few signs of improvement for American manufacturing workers, as wages are predicted to remain stagnant.

This could prove to work against Republicans in the coming midterm and general elections. Though industrial workers are typically a reliable Republican base, they could sour on their current representatives if they do not see their economic conditions improve as expected given Trump’s electoral promises.

Why are wages falling?

The rise of globalization

The ability for American consumers to purchase cheap products from overseas manufacturers has increased dramatically in the last thirty years, which ultimately spells trouble for domestic industry and its workers. Many domestic manufacturers are simply unable to keep up with cheaper foreign products.

In order to remain competitive, American companies must either sell their products at cheaper prices while maintaining quality, or move their operations overseas. For those firms opting to keep their base of operations in the United States they must streamline their production process, thereby shedding workers, or lower wages. In both scenarios, American workers are seeing their wages fall or stagnate due to globalization.

Decline in union membership

With the collective bargaining power of unions, workers have a better chance of earning more wage increases. However, since the mid-20th century, there has been a significant decline in union membership. In 1956, approximately 28% of the working population was unionized, but by 1983, membership had decreased to 16.8% of workers in the private sector. In 2016, only 6.4% of the workforce was unionized.

Unless there is a significant increase in union membership in the next ten years, policies such as lobbying against increases in the minimum wage or the salary threshold for overtime pay, will only gain further traction among employers.

The Great Recession of 2008-2009

The Great Recession profoundly changed employment patterns in the United States. In order to cut costs, companies made wholesale changes to their operations, such as using more part-time and seasonal workers. The recession also incentived employers to make greater use of robotics, the internet of things, and artificial intelligence in order to make products and services at a lower cost. Many economists and policymakers are concerned that this is the start of a long-term trend where the number of available jobs will further diminish, not only for unskilled workers, but also among the college educated.

Failure of the Phillips Curve

In orthodox economic thought, the relationship between unemployment and inflation has been modeled by the Phillips curve. The Phillips Curve asserts that if the unemployment rate is down, then inflation should go up due to a lack of workers. If employers cannot find workers, they will have to offer higher wages for new ones or to their existing workers, thereby causing inflation to increase given higher consumption patterns. However, reality has not been conforming to economic theory lately.

In fact, both inflation and unemployment are currently down, worrying economists and policymakers. The Federal Reserve is hoping for an uptick in inflation to show that there is some economic growth actually occurring. At the same time, employers are finding new ways to increase output at a cheaper cost. As a result, employers see no need to hire more workers nor to give their existing workforce a pay raise.

Economists are still struggling to explain why both unemployment and inflation are low. Whether this is the start of a new dynamic that may change the way economists and policymakers analyze the labor market, or if the concept may soon need to be discarded entirely is up for debate. Time will tell if there will be a new normal regarding the relationship between wages, inflation, and unemployment.

How low can it go?

In the long-term, wage stagnation will seriously impact economic growth. Traditional middle class consumption patterns will be unsustainable if inflation continues to outstrip wage growth. Industries that rely on middle class buyers will find their consumer base eroded and will suffer as a result, creating a downward spiral of pressure to cut costs in order to maintain profitability. Further, the U.S. housing market might be impacted as demand grows and middle class, would-be homeowners are outpriced.

Categories: Economics, North America

About Author

Arthur Guarino

Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School teaching courses in financial institutions and markets, corporate finance, and financial statement analysis. The first half of his career was spent in the financial services industry. He has written articles dealing with finance, economics, and public policy.