Stagnant wage growth and its implications on middle class Americans and the broader U.S. economy is no longer the exclusive province of lofty academics, egg head economists and Federal Reserve fan boys.
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The subject takes center stage in the White House’s annual report to Congress, the “Economic Report of the President” released Thursday.
After (unsurprisingly) taking credit for a laundry list of accomplishments -- the strongest period of job creation since the 1990s, a sharply reduced unemployment rate, significantly lower government deficits, a soaring stock market, etc. -- President Obama moved swiftly to a problem acknowledged on both sides of the political divide.
“Nothing helps families make ends meet like raising wages,” the president declared barely a full page into his introduction to the 400-page report.
Later, the economists who wrote the report go to great lengths to explain that stagnant wages is hardly a recent phenomenon, a temporary but fixable hangover effect from the 2008 financial crisis. Instead, the problem has been building for decades.
“For most workers, earnings gains have not kept pace with productivity gains over the last several decades,” the report states in a segment that covers wage growth patterns since the 1980s.
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Growing Rift Between Productivity and Wages
Essentially, the report explains that while technology has allowed productivity to increase during those decades, workers’ earnings have not risen correspondingly with that productivity.
According to the report, the government estimates that labor productivity grew at an annual rate of 2% between 1980 and 2014. During the same period, hourly compensation for the average worker rose 0.9% annually, “indicating that compensation did not keep up with productivity growth and that the share of gross domestic income going to capital was rising,” the report states.
As the report indicates, the rift between productivity and wages has also contributed to another economic division that has gained more widespread acknowledgement in recent years – the issue of wealth inequality in the U.S. As productivity has increased and raised profits for the owners of the means of production, their wealth has soared past the workers who are paid to ensure that production continues.
“The slowdown in wage growth has been felt most in the middle and bottom of the wage distribution,” the Economic Report of the President states.
Fueled by a combination of rising debt, sharp losses during the recent recession and long-term stagnant wages, the bottom 90% of U.S. families have seen the percentage of their ownership of total U.S. wealth fall to 23% in 2012 from 36% in the mid-1980s, according to a recent study by the Washington Center for Equitable Growth. Meanwhile, the top 0.1% -- a small number of extremely wealthy families -- has seen their percentage of total household wealth rise to 22% in 2012 from 7% in the late 1970s.
Short-term labor market issues -- described as ‘cyclical’ by economists -- many of them holdover residue from the financial crisis, are slowly working themselves out of the system. Also described as ‘labor market slack,’ these problems include a glut of temporary and part-time workers who are looking for fulltime jobs, discouraged workers who have given up looking for a job and over-qualified employees working below their skill levels.
As long as this pool of workers exists, employers know they don’t have to raise wages in order to attract qualified candidates. That’s kept downward pressure on average hourly wages.
Many economists feel the cyclical problems -- or slack -- are beginning to heal on their own as the economy strengthens and labor markets tighten. The strong January jobs report released earlier this month offered some evidence of that, as average hourly non-farm earnings rose by 12 cents, or 0.5%, to $24.75 in January, a notable turnaround from December, when wages fell by 5 cents. Still, over the past 12 months, average hourly earnings have risen by 2.2%, well below the 3%-3.5% growth range economists say is healthy.
‘Difficult’ Structural Issues
“We are absorbing that slack and by this time next year we will be seeing stronger wage growth,” predicted Gus Faucher, senior economist at PNC Financial Services Group.
Policy makers at the Federal Reserve adhere to this belief, as well, which will almost certainly pave the way for an interest rate hike later this year as the central bank attempts to return U.S. monetary policy to one of normalcy, or one devoid of Fed stimulus.
But larger issues -- known as structural problems -- continue to plague the economy, and until these issues are addressed the divide between the wealthiest Americans and the scrambling middle-class will continue to grow.
Economists such as Faucher concede that these structural issues will be far more difficult to solve than the temporary slack that has troubled labor markets since the financial crisis.
These issues include: a bi-furcated workforce increasingly split between good-paying high-tech jobs and low-paying service jobs; the importance of higher education offset by the increasingly high cost of obtaining that education; the bitter debate over raising the minimum wage; long-running battles over health care, tax and immigration reform; and the need for updated international trade policies.
“The answers here are more difficult because they require policy changes,” said Faucher. “Obviously, these are all highly divisive politically.”
The 2015 Economic Report of the President