When Will Americans Ever Get Raises?

A tightening job market no longer guarantees higher pay
Illustration by 731; Data: Current Population Survey

Americans are overdue for a fatter paycheck: Average earnings haven’t risen in more than six years. The labor market is finally recovering—the unemployment rate is down to 5.9 percent from 8.2 percent in July 2012—and that usually pushes up wages. But it’s not clear that job growth will translate into pay increases in 2015.

In an August speech, Federal Reserve Chair Janet Yellen speculated that “pent-up wage deflation” might have held wages down during the recovery. What does that mean? “In a downturn, employers may need to cut wages, but they are reluctant to do so,” says San Francisco Fed economist Mary Daly. They prefer laying people off, which they believe tends to have less impact on workforce morale, she says. The result is that when the economy recovers, employers are slower to raise pay than if they had imposed cuts during the slump. Daly says wages were slow to increase after the past three recessions, too. She estimates that unemployment will have to fall to 5.2 percent before wages begin rising.

Even a drop to that level might not be low enough to spur gains. Dartmouth economist Daniel Blanchflower says the labor market is in worse shape than the unemployment rate suggests. “Something changed in 2010,” he says. “The unemployment rate is no longer a sufficient statistic.” An accurate gauge of the market, he says, must include people who’ve given up looking for work and those working in part-time or low-paying jobs because they can’t find anything else. Measures that include discouraged workers, such as the labor force participation rate, have worsened since 2008. Blanchflower says pay won’t increase until the slack is absorbed, and he can’t predict when that might happen.

Today’s unusually high long-term unemployment could keep wages low for years, according to Till von Wachter, an economist at the University of California at Los Angeles. People who’ve been out of work for six months or more “may have seen their skills deteriorate,” he says, “and some job losers found their previous occupation is no longer available and skills not in demand. This happens in every recession, but this last one was worse because there was more job loss.” He estimates that each additional month you’re unemployed after the first month lowers your next job’s pay by almost 1 percent.

He also found that if you join the workforce during a recession, your wages may be depressed for more than a decade. During the financial crisis, “labor market entrants lost out on those crucial 5 to 10 years on their first job,” he says, and “having a bad start can have bad effects that linger.”

A greater concern is that wage stagnation may reflect long-term trends. Real (inflation-adjusted) wages have barely increased since the start of the millennium. Before 2000, earnings and the unemployment rate generally moved in opposite directions. When the labor market was tight, wages rose. But after 2000, the relationship broke down.

One possible explanation is that as a result of the recession, many Americans had to shift into lower-paying jobs. From 2007 to 2009, manufacturing employment fell 13.7 percent, the largest decline since World War II. Job growth was concentrated in service occupations, many of them low-paying. In 2013 the median manufacturing wage for a 40- to 49-year-old was $38,500; sales and low-skill service jobs paid just $26,600.

America’s growing trade with lower-wage countries, such as China and Mexico, has a damping effect on pay at home. Employers are also spending more on health insurance and retirement benefits rather than cash compensation. In 2000 nonwage benefits made up 27.4 percent of total compensation. In 2014 they accounted for 31.3 percent.

No one is ruling out the possibility that wages could start to rise in 2015. The outlook was equally bleak in the early 1990s, after a severe recession and a period of pay stagnation. Then economic growth picked up and, starting in 1996, median earnings increased 8.6 percent in six years.

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