Unhappy With Your Raise? Don't Blame Trump, Yet
It's not President Donald Trump's fault that U.S. workers are seeing such meager wage gains. It could be, though, if he doesn’t address one of the biggest things holding them back: weak productivity growth.
U.S. employers turned in a respectable performance in August, adding an estimated 156,000 jobs to nonfarm payrolls. Although the unemployment rate ticked up to 4.4 percent, that's still a level that indicates the economy is running close to full capacity. But in a pattern that has become sadly familiar, the demand for labor didn’t do much to push up wages. Average hourly earnings rose just 2.5 percent from a year earlier, roughly a percentage point short of the pace that prevailed before the last recession. Here's a chart:
What gives? One explanation is that, with millions of able workers on the sidelines or stuck in part-time jobs, labor isn't as scarce as the low unemployment rate suggests. That said, in the longer run, wages face a hard constraint: In inflation-adjusted terms, they can't grow much faster than the rate at which employees are becoming more productive -- that is, eking out more goods and services for each hour worked.
These days that's a tight constraint, because labor productivity has been increasing at an average annual pace of just 1 percent since the economy hit bottom in mid-2009, compared with a 30-year average of almost 2 percent. Worse, those gains don't all flow back to workers in the form of higher pay. In the past several economic expansions, inflation-adjusted hourly compensation has grown on average only about half as fast as productivity, and that share has been declining. Here's how that looks:
If this is the new normal, it's hard to see how wages can sustainably grow much faster than they have been. At about 1 percent in inflation-adjusted terms, they're already pushing the longer-term limit.
What to do? Some economists think we'll never again match the technology-driven productivity gains of the late 1990s and early 2000s. Even if they're right, that's no reason to settle for the status quo.
To his credit, Trump had some potentially useful policies in his campaign platform. They included repairing and upgrading the country's crumbling infrastructure, reforming corporate taxes to encourage productivity-enhancing investment, and focusing on attracting more high-skilled immigrants.
So far, though, the president's execution has been wanting. His plan for $1 trillion in infrastructure investment has gone nowhere. His travel ban has spooked potential immigrants without offering anything positive. His chances of achieving a sensible tax reform are looking slim. And pressuring companies to keep jobs in the U.S. won't make them more productive.
Political choices have economic consequences. If American workers still aren't seeing decent raises years from now, they may at least in part have Trump to thank.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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