Economic growth being slowed by stagnant wages? Among other things …

posted at 1:21 pm on August 26, 2013 by Bruce McQuain

That’s certainly one of the factors keeping GDP growth low.

Four years into the economic recovery, U.S. workers’ pay still isn’t even keeping up with inflation. The average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show.

Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth.

Not only that, but unemployment remains historically high years after the so-called recovery.  The question, however, is why wages are remaining stagnant.  The WSJ cites three factors:

Economic growth remains sluggish, advancing at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%. That effectively has put a lid on inflation, which has been near or below the 2% level the Federal Reserve considers healthy for the economy. With demand for labor low, prices not rising fast and 11.5 million unemployed searching for work, employers aren’t under pressure to raise wages to retain or attract workers.

Emphasis mine.  The Fed is happy with the inflation rate.  And the administration, despite numerous claims to be focused like a laser beam on “j-0-b-s” has done little if anything to address unemployment or economic growth.  Finally, given the uncertainty that regulation and new laws (such as ObamaCare) bring to the table, employers are even less likely to hire until the regulatory and legal dust settles and they have a much better idea of how both effect their business and industry.

Secondly:

Businesses are changing how they manage payrolls. Economists at the Federal Reserve Bank of San Francisco in a recent paper said that, in the past, companies cut wages when the economy struggled and raised them amid expansions. But in the past three recessions since 1986—and especially the 2007-2009 downturn—companies minimized wage cuts and instead let workers go to keep remaining workers happy. As a result, to compensate for the wage cuts that never were made, businesses now may be capping wage growth. “As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels,” the researchers said.

Another point to make, again considering the unemployment rate, is that those working are glad to still have a job.  And with the economy still struggling it is unlikely that many feel the time right to push for higher wages.  In fact, it is a “buyers market” right now when it comes to labor.  And it will remain one until we get into much higher growth percentages and the demand for labor begins to outstrip the supply.  We’re not even close to that at this point.

Finally:

Globalization continues to pressure wages. Thanks to new technologies, Americans are increasingly competing with workers world-wide. “We are on a long-term adjustment, as China, in particular, but all developing countries, get their wages closer to ours,” said Richard Freeman, an economist at Harvard University. According to Boston Consulting Group, there will be only a roughly 10% cost difference between the U.S. and China in making products such as machinery, furniture and plastics by 2015.

Technology is also replacing workers in many industries.  Automation is especially tough on low skilled workers.  But again, given laws like ObamaCare, the incentive at work is to have fewer employees, not more.  Businesses will automate where it makes sense and helps make a profit.  It is also a means of closing that wage gap mentioned above, so it isn’t a trend that is likely to end anytime soon.

All of those factors and what I’ve mentioned in addition to them combine to make unemployment and wage growth both remain static.  There simply aren’t any incentives at the moment to hire more people.  Certainly not in GDP growth.   Certainly not with the plethora of new regulations and laws.

In fact, as is mentioned in the article, at the moment there are only two paths to higher wages:

The only path to wage gains is through a stronger economy or an increase in demand for specialized skills.

The economy is moribund and has been for quite some time with GDP growth under 2% for the last three quarters.

That narrows the path to wage gains to a single one – developing specialized skills.  It isn’t a path open to everyone, unfortunately, for a number of reasons.

So how could government help change all of that?  Quite simply by getting out of the way – something it seems completely unable to comprehend or do.

And because of that, it continues to contribute negatively to the economic situation we endure.

~McQ


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