Why Are Wages Growing So Slowly?

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Unemployment reached a nine-year low toward the end of last year. Wages have grown five out of the past six months, according to the Bureau of Labor Statistics. The PayScale Index, which measures the change in wages for employed U.S. workers, forecasts 3.2 percent year-over-year wage growth for Q1 2017. So why aren’t workers celebrating?

In part, because inflation is growing along with wages, meaning that the buying power of those paychecks is less — 7.4 percent less compared to 2006, per PayScale’s Real Wage Index. Also, wages are growing — but they’re not growing as fast as they once did, even without taking inflation into account.

At CBS News, Anthony Mirhaydari explains:

…wages are taking a step down, as measured by the Federal Reserve Bank of Atlanta, which estimates non-inflation-adjusted wage growth slowed to 3.2 percent annual rate in February from 3.9 percent in November. Back in 1999, wage growth averaged around 5 percent. And near the end of the last business cycle in 2007, wage growth was clocking in at a rate better than 4 percent.

Why Aren’t Wages Growing Faster?

Economists have proposed several reasons for why wages aren’t growing more quickly, including:

  1. It’s still an employer’s (job) market.

The economy is approaching or at full employment — but unless it stays there for a significant period of time, some economists feel that wages may not rise.

“Unemployment is not that far below full-employment levels at 4.8 percent, so companies do not need to pay more in wages to retain workers,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said in a note, as reported by The St. Louis Post-Dispatch. “The economy is at full employment and has not moved significantly beyond full employment that could stoke the fires of inflation.”

  1. Wages didn’t drop low enough during the recession.

Economists at Bank of America Merrill Lynch say that among other factors, one issue affecting wage growth may be lack of wage adjustment during the recession:

Wages didn’t adjust downward enough given the job losses suffered during the financial crisis and recession due to the wage ‘stickiness’ phenomena: Businesses can’t cut worker pay to match new market conditions for fear of demotivating them. They can either fire them or freeze wages for an extended period.

  1. Low union membership = lower wages.

Union membership is at a historic low; last year, only 10.7 percent of American workers belonged to a union, according to the Bureau of Labor Statistics. That’s important, because union workers earn more than non-union workers. One report found that the median weekly wage of non-union workers was just 79 percent of that of those who belonged to a union.

Tell Us What You Think

Have you seen your wage growth stagnate in recent years? We want to hear from you. Tell us your story in the comments or join the conversation on Twitter.