Our intractable problem: wages

Photo by Sean Murphy/The Image Bank via Getty Images.

After climbing 12 cents in January, wages fell 3 cents in February. So what’s going on? Photo by Sean Murphy/The Image Bank via Getty Images.

The U.S. economy added 242,000 jobs in February, and the unemployment rate remained unchanged at 4.9 percent. Adding to the good news, December and January’s jobs numbers were revised upwards some 30,000 jobs in total.

Overall, it was a solid jobs report. The labor force participation rate rose to 62.9 percent, suggesting that more discouraged workers are coming back into the workforce. The Bureau of Labor Statistics’ U-6, which measures underemployment, dropped from 9.9 percent in January to 9.7 percent in February. Even our more comprehensive Solman Scale U-7 — which includes involuntary part-time workers, anyone who says they want a job, no matter how long it’s been since they last looked, in addition to the officially unemployed — fell to 11.9 percent. To put this in perspective, the U-7 was at 13.3 percent one year ago.

But there was just one pesky measurement that refused to budge: wages.

After climbing 12 cents in January — a bright spot in the report — wages fell 3 cents in February.

So what’s going on?

Economic theory assumes that the tighter the labor market, the higher the wages. When more workers are competing for jobs, employers can hire on the cheap. In such an economy, workers are just happy to have a job. However, when employers have slim pickings, they have to pay more to attract and retain workers.

In fact, economists Dean Baker of the Center for Economic and Policy Research and Jared Bernstein of the Center on Budget and Policy Priorities found that for a typical low wage worker, a sustained 10 percent drop in unemployment rate was associated with a 10 percent increase in hourly wages.

One would then expect that with low unemployment — and 4.9 seems to fall into that category — wages would increase. But many economists point out that the 62.9 percent labor participation rate remains low by historical standards, suggesting slack in the market — plenty of discouraged workers sitting on the sidelines, waiting to jump back into the workforce once they have reason to believe employment prospects are good.

Josh Bivens of the left-leaning Economic Policy Institute said that the drop in wages in February “is a real stumble in getting wage inflation higher.” But, he added, we may be seeing slack in the market because more people are hopeful that job prospects exist and are jumping back into the labor market for them. The only problem? Not all of them have found jobs yet.

“We’re moving on the labor force [participation rate], and that’s quite significant,” said Douglas Holtz-Eakin of the conservative American Action Forum. Once we can get rid of that slack, he added, policymakers need to let the normal mechanisms do their job and let wages rise.

But there’s another factor to keep in mind: productivity growth. “The way to get wages to go up is higher productivity growth,” said Hotlz-Eakin. Unfortunately, we’re not seeing that. Productivity growth fell 2.2 percent in the last quarter of 2015.


A new and depressing report by the left-leaning Center for American Progress shows this wage stagnation is especially true for millennials.

The report showed that median compensation for 30-year-olds in 2014 was $19.30 an hour. This was nearly the same as it was for their counterparts in 1984 at $18.99 an hour adjusted for inflation. And in fact, 30-year-olds in 2004 made $20.63 an hour — over a dollar more than 30-year-old millennials today.

It’s not a lack of education or skill holding millennials back. Millennials are 50 percent more likely to have finished college than their counterparts 30 years ago. The Center for American Progress points to a “labor market where the deck is stacked in favor of employers at the expense of employees” as a primary cause for this wage stagnation.

“They’ve only worked in an economy recovering from recession,” said author of the report Brendan Duke. In addition to that, “they don’t have the key tools to help them cope with a loose labor market.”

One of those key tools is bargaining rights, said Duke, which lessens the blow of recessions. In 2014, less than 6 percent of private-sector millennial workers were in a union. But 30 years earlier? Seventeen percent of their counterparts belonged to a union. It comes of no surprise then that the Center for American Progress calls for policies that make it easier for workers to form unions in addition, of course, to monetary policies that promote employment.

Whatever the solution is to stagnant wages, a paycheck bump can’t happen soon enough for the nearly two-thirds of Americans living paycheck to paycheck.