Unemployment is at an all-time low. Your skills are in high demand. The Texas economy is soaring (1 in 7 U.S. jobs created in the past year were created in Texas). Yet, Pew Research Center reports that real wages have barely budged for decades. Today’s average real wage (after accounting for inflation) has about the same purchasing power it did in 1978.
So why aren’t wages soaring, too?
Chances are, your employer isn’t just stingy with its checkbook. The issues surrounding real wage growth is much more complicated.
“Wage stagnation has been a subject of much economic analysis and commentary, though perhaps predictably there’s little agreement about what’s causing it,” says Pew Research Center Senior Writer Drew DeSilva.
He offers one theory in particular: Rising benefit costs, particularly employer-provided health insurance, that may be constraining employers’ ability or willingness to raise cash wages.
Harvard Business Review (HBR), though, points to uneven distributions of productivity gains. “For wages to grow on a sustained basis, workers’ productivity must rise, meaning they must steadily produce more per hour, often with the help of new technology or capital,” write economists Jay Shambaugh and Ryan Nunn. But then, they add, those same workers aren’t receiving a consistent share of their productivity gains. “For the typical worker to see a raise, it is important that workers’ gains are spread across the income distribution. If wages are rising but the increases are all going to the best-paid workers, the typical worker doesn’t see a gain.”
JP Morgan Chase and Co. Economist Jim Glassman further explains the productivity paradox like this:
“The decoupling of wages and productivity was likely caused by technological shocks, such as the emergence of automation and advances in information technology,” he says. “Capital investment in new labor-saving machines accounted for a disproportionate share of workers’ increasing productivity, and businesses were able to keep much of the return on their investment…As a result, workers are now taking home a smaller slice of the nation’s economic pie.”
Glassman goes on to explain how deregulation and globalization plays a part, too. “Businesses can no longer count on consumers to shoulder rising labor costs,” he explains. “Globally competitive manufacturers know that their customers have other options—if a manufacturer hikes prices to offset the cost of higher wages, they likely will lose market share. Wages cannot rise faster than the market will bear. Notably, wage gains since 2007 have been strongest in the highly regulated utilities sector.”
And the buck doesn’t stop there. Shambaugh and Nunn mention other potential culprits, including the continuing decline of labor unions, lagging educational attainment relative to other countries, noncompete clauses and other restrictions on job-switching, and a large pool of potential workers who are outside the formally defined labor force (neither employed nor seeking work). University of Texas Professor of Economics Sandra Black finds this research interesting, which shows that companies in cities with less labor competition skew the national average for real wage growth.
If you’re looking for other theories and more in-depth views of those mentioned above, Shambaugh and Nunn helped compile the report Thirteen Facts About Wage Growth for the Brookings Institute, which may answer your questions.
The bottom line is that, when it comes to real wages, the barriers to growth are many. While your employer may want to raise your wages at a faster rate, its hands may be tied by any number of factors. The good news is that wages really are rising (slowly and surely)—in some industries and for some job positions more than others.
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