U.S. Wage Growth: The Downward Spiral

It's not surprising that worker incomes have been under pressure during the Great Recession. Employers typically clamp down on wages when the economy slows, and the latest downturn was the worst since the 1930s. Most workers are well aware that employers aren't exactly going to be handing out huge wage hikes with an official unemployment rate of 9.7% and the government's broadest measure of unemployment, which includes those marginally attached to the workforce and people working part time who would like full-time employment, at 16.5%, according to the Labor Dept.'s January employment report released Feb. 5.

What is disturbing is that the outlook for wages and incomes over the short and long term looks bleak even when the recovery is in full swing. The pay rewards for work have been severely lacking for a majority of workers over the past three decades. Whether the measure is wages, earnings, or total compensation, the inflation-adjusted pay narrative remains the same: Workers have seen their inflation-adjusted pay go up only a little during the past four business cycle expansions while most of the gains have been captured by the top 10% to 15% of workers. A major lesson of the Great Recession is how financially vulnerable workers are with jobs and incomes less secure than ever.

"It isn't a healthy economy," says Paul Osterman, professor of human resources and management at the MIT Sloan School of Management. "There is a broad sense that it's a precarious labor market."

Wage Increases Expected to Stay Low

Average hourly earnings for all private-sector workers are up 2% over the past 12 months, according to the Bureau of Labor Statistics. Large employers are expected to raise employee base salaries by a mere 2.5% this year, according to Hewitt Associates (HEW), the human resources consulting firm. That would be the second-lowest wage increase on record, with last year's 1.8% gain as the smallest ever. And to keep fixed costs down, companies are embracing variable pay plans, annual lump-sum bonus payments that don't get added to base salary. Some 90% of U.S. corporations have put in place a broad-based variable pay plan for everyone below the executive level, compared with less than 50% in the early 1990s.

"I wish I was casting a brighter future," says Ken Abosch, head of Hewitt's North American broad-based compensation consulting practice. "But it is what it is, and we might as well get used to it."

Those workers with jobs are likely to put in more time in the office and on the assembly line in 2010. Employers typically hike the hours of their existing employees early in a recovery before posting help wanted signs. The average workweek for all private employees in January was 33.9 hours. Bringing the hours worked back to the average workweek at the start of the recession in December 2007 (34.7 hours) is the equivalent of hiring 2.5 million workers, according to Heidi Shierholz, economist at the Economic Policy Institute (EPI) in Washington, D.C.

How many workers imagine they'll stroll into the boss's office and insist on a 5% to 10% raise this year or they'll leave? The boss's answer in most cases, assuming he is able to speak after a fit of convulsive laughter, will be "goodbye."

Productivity-Wages Disconnect

The income story in America is deeply troubling. Inflation-adjusted average hourly earnings for production and nonsupervisory workers (a category that encompasses 80% of the workforce and leaves out higher-paid managers and supervisors) rose by an anemic 0.1% a year from 1979 to 2007, according to the EPI. A potent combination of economic and social forces has conspired to keep wages down for most workers with the exception of a brief period of white-hot economic growth in 1995-2000. Private-sector unions have largely disappeared. Companies have outsourced all kinds of tasks to cheaper places overseas and low-cost contractors at home. The upward spiral in health-care costs has eroded wages. Intense competition unleashed by globalization, deregulation, and technological upheaval has kept a tight lid on compensation.

The traditional relationship between productivity improvements and higher wages has been severed. Productivity growth is the fundamental building block of better living standards. Wage growth and productivity growth usually move in tandem, but no longer. During the expansion of the 2000s, productivity jumped by 11% while median hourly compensation went nowhere.

This disconnect is potentially a big deal. The late management philosopher Peter Drucker once noted that for Karl Marx and other 19th century economists the only way to boost productivity was to work employees harder and longer. This perspective was behind his famous proclamation that workers faced a future of relative "immiseration," or impoverishment. That's why Drucker celebrated the rise of American engineers like Frederick Taylor and management gurus such as Alfred Sloan: They showed the economic and social promise of working smarter. Rising productivity now meant worker wages could go up and the price of goods and services could go down.

"Without Taylor, the number of industrial workers would still have grown fast, but they would have been Marx's exploited proletarians," Drucker wrote. "Instead, the larger the number of blue-collar workers who went into the plants, the more they became 'middle class' and 'bourgeois' in their incomes and their standards of living."

Today, it seems like we're back to the future.

Bleak Long-Term Outlook

Of course, America is a much wealthier society than three decades ago. Even after the trauma of the Great Recession, Americans own bigger homes, cars, televisions, and other things. Personal computers, the Internet, cell phones, and other telecommunication devices have transformed everyday life. And not everything was bought on a debt-financed mirage. We're wealthier because families boosted their incomes as women entered the workforce. In 1968, 38% of married women ages 25 to 54 with children worked out of the home. That figure is now more than 70%. Mom and Dad also work about 20% more hours than in 1968.

Yet the money push from the rise of two-income couples has leveled off. (Sorry, you can't send the kids off to work.) Families will be forced to live off wages that have reached a plateau.

The long-term earnings picture deteriorates for many of those that have been laid off. In essence, research shows that a large number never recover from the financial loss. For example, after the deep recession of the early 1980s it took four to five years for overall wages to recover. Columbia University economist Till Marco von Wachter examined the experience of workers that had stable jobs going into the recession and were let go during the downturn. He calculates that the short-term wage loss was about 30% in the year immediately after getting a pink slip while the average long-term loss was 15%. To be sure, while 25% of laid-off workers did bounce back to the same wage level or better, the remainder were worse off. "There's nothing to suggest that today will be very different," says Wachter.

There's the rub. Nothing on the horizon suggests that a majority of workers will take home a bigger slice of the economic pie anytime soon. The bleak wage outlook and growing financial insecurity isn't a passing phenomenon reflecting the downward momentum of a recession and the fragility of the recovery. It's understandable that most people are worried about the parlous state of the job market, yet it will recover with time. The same can't be said for worker wages and family incomes. And that outlook is a long-term threat to America's prosperity.

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