Don't Bet on Rising Wages

By a significant margin, economists are feeling optimistic about the year ahead. In a recent survey conducted by USA Today, a large majority said that they expect wages to climb this year, after five years during which there has been hardly any growth at all.

That would appear to be very good news. But there are strong reasons to question whether these rosy expectations will come to pass.

First, the expectations rest on the assumption that wages will rise as the job market continues to tighten. That was the familiar pattern for a considerable portion of the 20th century. Economic activity would pick up; companies would hire to meet the surge in demand; fewer people looking for work meant that companies needed to pay more to attract and keep workers; rising wages meant increased inflation, and so on. Today, although first-quarter growth was almost zero, the sense is that activity is picking up; the unemployment rate has been falling, and if past patterns hold, wages should soon increase.

But what if past patterns don’t hold? Take the move toward onshoring of American manufacturing. There does seem to be a move toward factories reopening in the United States, as labor costs in China go up and wage costs in a less unionized America are lower than they were decades ago, when those jobs began evaporating. Yet those new factories, whose output will boost GDP growth, are only hiring hundreds of people each. Back when those patterns of increased output and rising wages evolved in the mid-20th century, those numbers would have been in the thousands.

And why should companies feel compelled to increase wages at all? The argument that a tighter labor force will lead to higher wages may hold true for skilled jobs, high-tech jobs, and jobs that require specialized abilities in high demand. But for lower-end jobs—at mass retailers and fast-food restaurants, in temporary work— where will the pressure to increase wages come from?

Some observers, such as the Center for Economic and Policy Research’s Dean Baker, argue that one of the unintended consequences of Obamacare will be a tighter labor force: Older workers and workers in poor health who had kept their jobs only because they needed health care will now retire; companies will then have to find people to fill those positions, for which they will pay higher wages. Others, following enshrined economic theory, simply see rising wages as an inevitable part of the economic cycle.

These patterns might play out as expected. But there’s also a rising chorus demanding that the federal government increase the minimum wage nationally, while local governments have spurred their own initiatives to increase wages. This movement suggests that workers—especially on the lower end—aren’t yet seeing much in the way of increases, or even anticipating them save for government intervention.

In addition, the assumption that wages will rise on their own may be based on two flawed metrics. One is the unemployment rate, and the other is average wages. If the unemployment rate could adequately capture the shifting sands of overall employment patterns, then we’d have definite signs that the labor market was tightening. But the rate itself is going down not because there is such robust job growth, but primarily because the statistical size of the labor force keeps shrinking.

Given our current methods of assessing the labor market, there is no way of knowing whether the people who aren’t counted by the Bureau of Labor Statistics are voluntarily opting out of jobs, and why—because they are entrepreneurs, or because they are retiring early, or because they have given up looking for work. That means that any comforting assumptions we make about what is happening to our workforce and what it means for wages are based on incomplete or limited data at best.

Finally, the metric of average earnings tells us much less than we think. As calculated by the Bureau of Labor Statistics, average hourly earnings are calculated from gross payrolls reported to the government divided by total hours worked by everybody. It is an average. So too are wage numbers, which are higher because they include benefits.

The challenge with averages is that they tell us little about how individuals are actually doing. If you take 1,000 people, and 200 of them see their wages go up 10 percent, and those 200 are earning $50,000 a year while the other 800 are earning $30,000 a year and see no wage growth, the average gain for all 1,000 people is $1,000 a year, or nearly 3 percent for the entire group. It would therefore be true if I said that those 1,000 people saw about a 3 percent increase in their wages. It would also be misleading, because what really happened is that a smaller group did very well while everyone else flat-lined.

That is much closer to the reality in the U.S. today: a majority treading water, a significant but small group—tied to information technology and high-end services, and clustered in vibrant urban areas—doing quite well, and a very small number at the top doing extraordinarily well.

If it does happen that wages in general rise this year as output and activity increase, it will certainly be good news for a considerable number of people. If the news if good for even a third of the population in a country of 320 million, that’s quite a handful, and something to celebrate. But that is a far cry from wages and incomes increasing for all of those who are currently struggling.

If you believe that there will be a return to familiar economic patterns of the past, that offers some hope for income growth for the many. But if those patterns are breaking down, as they have in the past decade or more, then there is little reason to believe that the challenges of income, labor, and living standards will just work themselves out organically. On the contrary. Our economic system is morphing, and it is indifferent to how rewards and benefits distribute themselves. There is much to be hopeful about given the continued dynamism of innovation and technology, but for the near term at least, rising pay for those who aren’t part of that dynamism is likely not one of them.

This article originally appeared on Slate (May 15, 2014)


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