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Commentary: Workers Are Doing Well, But Will It Last?

News: Analysis & Commentary

Commentary: Workers Are Doing Well, but Will It Last?

Most Americans raked it in again last year as the U.S. economy continued its astonishing boom. Annual household incomes bested inflation by 2.7% last year, hitting $40,816, the highest level ever, according to the latest numbers released by the Census Bureau on Sept. 26. The poverty rate fell again, to 11.8%, the lowest level in 11 years, the bureau also reported. And while the gap between the rich and the poor didn't decline, at least it didn't get any worse.

What's less clear is whether the spectacular performance is continuing in 2000. Most families derive the bulk of their income from wages. But the solid gains in inflation-adjusted pay rates that began in 1996 slacked off in 1999 and ground to a halt during the first half of this year. The reason: Employees haven't kept pace with the creeping inflation kicked off by soaring oil prices late last year. Despite four years of tight-as-a-drum labor markets, workers in many sectors still lack the muscle to grab big pay hikes. Indeed, over the entire recovery, wage hikes have lagged productivity gains by a substantial margin. Wage growth has provided only about half of families' higher incomes in recent years, with the rest coming simply because employees are clocking longer hours on the job.

An inability of employees to command higher pay, of course, is hardly all bad. With no wage-propelled inflation on the horizon, the Federal Reserve is less likely to raise interest rates. Still, if the oil-induced price hikes, which have pushed the consumer price index to 3.4%, don't reverse soon, the average family isn't likely to see a repeat of last year's income gains. "Living standards have really increased in the past few years, but now they're being threatened by higher prices," warns Jared Bernstein, an economist at the Economic Policy Institute, a Washington think tank.

No question, most Americans are rolling in dough these days. Last year's big income gain marked the fifth consecutive year in which U.S. households beat inflation. It also put inflation-adjusted incomes a solid 5% above the last time they peaked, in 1989. And perhaps the best news: The prosperity in 1999 was widely shared among lower-income families. Those in the bottom fifth of households, for example, saw their average income climb by 4.4% last year. That explains why the poverty rate fell by nearly a full percentage point.LONGER DAYS. Holding on to those gains, though, could be difficult. Annual wage gains before inflation is taken into account--a good measure of workers' bargaining clout in the labor market--have remained in the 3% range for most of the 1990s. That was great when the CPI hovered around 2%, leaving employees with pay rates that exceeded inflation. Now, however, with higher consumer prices, real wage gains this year have so far been nonexistent.

Of course, the spoils of the New Economy are still getting dished out to those with the right jobs and skills. But many other employees still face the same forces that kept wages in check in the early 1990s: higher immigration, deunionization, and globalization. Steel imports have surged again this year, for instance, threatening the jobs of many U.S. steelworkers. As a result, the United Steelworkers have had to swallow below-inflation pay hikes. On Sept. 1, 900 USW members at AK Steel Corp.'s Ashland (Ky.) plant accepted pay hikes of 2.6% a year for five years. "We didn't want be out there demanding more money when the industry is on its heels," says Roy Murray, the USW's head of collective bargaining services.

Many economists think oil prices will back off later this year, bringing inflation down as well. If that happens--and the economy remains strong--wages should start to gain ground again. That would allow family incomes to continue to post healthy gains. Income growth could even keep rising if wages stay flat: As families work ever more hours, the average American has been putting in about 30 more hours per year than in 1995, according to EPI's analysis of Census data. But if inflation remains above 3%, families had better expect to work even more hours if they don't want to see their living standards decline for the first time in years.By Aaron Bernstein; Senior Writer Bernstein Follows Workplace Issues from Washington.Return to top

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