Why Wages Aren’t Rising
February 23, 2015
In many countries around the world, stagnant or falling wages remains a paramount policy concern. In Japan, for example, boosting earnings is a central goal of “Abenomics.” In the United States, a central theme for all of the aspiring presidential candidates will be their ideas on what President Obama has recently been calling “middle class economics.” As we have written about earlier, this policy concern about flat incomes is entirely warranted.
Much of the analysis of worker incomes has focused on the “tightness” of the labor market; that is, on how strong labor demand is relative to the supply of workers. The World Financial Crisis reduced labor demand through many channels, as evidenced in so many countries by high un- and under-employment. But in the United States and at least some other countries, there’s been a strong recovery in labor demand. By many conventional measures—such as over one million new payroll jobs created in just the past three months and an unemployment rate of just 5.7 percent—today there is far less evidence of excess labor supply.
So with tightening labor markets, why aren’t wages rising? The short answer is, “because labor productivity is rising so slowly.”
To gauge the average standard of living of a country’s citizens, the single most important indicator of well-being is labor productivity: the average value of output of goods and services a country produces (typically measured as gross domestic product, GDP) per worker. The more and better quality goods and services people produce—that is, the more productive they are—the more income they tend to receive and the higher standard of living they can achieve. Of course, as the recent experience of rising income inequality in so many countries shows, no law of physics mandates that productivity gains boost the earnings for all workers. But slow growth in labor productivity almost surely means slow growth in earnings for many workers, and faster productivity growth at least creates greater odds for income growth for more workers.
As the latest U.S. government data show, productivity growth in America has recently been very poor. Output per worker hour in the U.S. non-farm business sector grew in 2012, 2013, and 2014 by just 1.0 percent, 0.9 percent, and 0.8 percent, respectively. Contrast this with the late 1990s and early 2000s: in the decade of 1995-2005, productivity growth averaged 3.0 percent per year. This surge was widely visible in accelerated growth in U.S. GDP, jobs, and worker earnings. At one point in 2000, U.S. unemployment dipped to just 3.9 percent and for several years during this period earnings rose briskly for all U.S. workers—even less-skilled workers including high-school dropouts. These large economic gains spread even to the U.S. government, for which unexpected surges in tax receipts led to federal-budget surpluses from 1998 through 2001, the first surpluses in generations.
Yes, slack labor markets hold down worker earnings. But over time, wages tend to stagnate not because of insufficiently strong labor demand but rather because of poor productivity growth. Central banks expanding their balance sheets via quantitative easing can help create jobs, but these expansions have little impact on the quality of those jobs. Rather, it is policies like high-quality education, openness to trade and immigration, and competitive business taxation that determine how productive are the jobs that a country’s companies create. Unfortunately, the United States and many other countries continue to achieve very little in these policy areas. The resulting poor growth in productivity and in wages should, sadly, surprise no one.
Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.