Six Things Central Banks Don't Get About Wages, Part 2

Low-paying jobs are on the rise, union membership is down and productivity has fallen.

The problem with wages.

Photographer: Tim Boyle/Getty Images

On Monday, I examined three significant economic changes that have contributed to wage stagnation in recent years: globalization, ample global supplies of employable people and machines, and surplus U.S. labor. Here are three more.

4. The shift to lower-paid jobs. 

In this economic recovery, the jobs that are being created are mainly in low-paid work. It’s been in sectors such as retail trade, where real wages have risen just 0.9 percent in total since the beginning of 2007. Similarly, the 3 million increase in hotel clerks, waiters and other leisure and hospitality jobs in this recovery has far outstripped the 900,000 gain in manufacturing. 

In June, manufacturing employees were paid $26.51 per hour, compared with the $15.43 per hour earned by leisure and hospitality workers. In addition, manufacturing employees worked 1.56 times as many hours, so their weekly pay of $1,081.61 was 2.69 times the $402.72 paid to the average leisure and hospitality employee. Even within industrial sectors, wages have been restrained as postwar babies at the top of their pay scales retire and are replaced by lower-paid new recruits.

5. Union membership. 

With globalization devastating U.S. manufacturing jobs and cost-cutting putting pressure on those that remained, union membership in the private sector has collapsed from a quarter of the total workforce in 1973 to 6.4 percent last year. This has had tremendous depressing effects on wages, since private union jobs on average offer 19 percent more in base pay than non-union positions, and over 50 percent more when health care, retirement and other benefits are included.

State and local government employees have enjoyed much higher pay and even more lush benefits than private-sector workers. Nevertheless, municipal employee compensation is under fire from many states and local governments with strained budgets and vastly underfunded pension plans. At the same time, municipal union membership is slipping.

Many employees are reluctant to demand higher pay because memories of the recession are still fresh. There also is an understanding among those who quit in the hope of getting a higher-paying job that they will probably end up with lower pay. On the other side, most employers, in the face of foreign and domestic competition, don’t believe they can pass on increased labor costs by boosting prices. The only alternative is increased productivity so higher costs can be paid without cutting into business profits. But miserable productivity growth has not provided the value added to justify higher wages.

6. Productivity. 

Productivity growth averaged 0.53 percent per year in the 2011-2016 period, far below the earlier norm of 2 percent to 2.5 percent. Reasons for the slowdown are many, but some economists suggest that such growth is being significantly understated. Mobile phones and other high-tech gadgets probably enhance efficiency of doing business far beyond their cost. Consider the value of time saved by shopping online, which is not captured in the statistics. The costs of new wonder drugs, high as they are, probably do not measure their value in saving lives.

The output in service industries is hard to measure, especially since quality can vary widely. One lawyer may bill twice as much time for reviewing a contract as another but make twice as many mistakes. The problem of measuring output in services only grows as services become an ever-greater share of spending.

Another explanation for slow U.S. productivity growth is that American multinationals have moved intangible assets such as patents and other intellectual property overseas in order to avoid paying taxes. Such actions slowed reported U.S. productivity gains by an estimated 0.25 percentage point per year between 2004 and 2008.

Although new technologies that enhance productivity are mushrooming, they often take decades before becoming big enough to move the overall productivity needle. The Industrial Revolution began in England and New England in the late 1700s, but only after the Civil War had it expanded to the point of hyping nationwide productivity. Ditto for railroads. As a result, between 1869 and 1898, real GDP per capita leaped at a 2.11 percent annual rate. It’s now rising around 1 percent annually.

Other forces may well push productivity, such as significant tax reform, education reform, deregulation, unifying state licensing requirements that now often impede labor mobility and reforming entitlements to encourage people to work. Also, there’s nothing like a stronger economy to create labor demand and the resulting high employment and wages. 

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