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What's up with sluggish wages increases?

Date Posted: October 19 2018

Hourly construction industry wages have been higher this year. The industry averaged $30.18 in September, exceeding $30 per hour for the first time, and an increase of 3.1 percent from a year earlier. That's a bit higher than the 2.8 percent raise in the past year for all U.S. workers, whose average pay was  $27.24 per hour.  The flip side of the historically modest wage increase in September is the nation's inflation rate, which is at 2.7 percent for the 12 months ending August 2018. Thus, real earnings were about flat for nearly all U.S. wage earners, and only rose less than half a percent for construction workers over the past year. 

"Despite the strong labor market, wage growth has lagged economists’ expectations," said Pew Research in July. "In fact, despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers.

"The 2.7 percent increase in wage growth as of August is "in line with average wage growth over the past five years," Pew said. "Year-over-year growth has mostly ranged between 2 percent and 3 percent since the beginning of 2013. But in the years just before the 2007-08 financial collapse, average hourly earnings often increased by around 4 percent year-over-year. And during the high-inflation years of the 1970s and early 1980s, average wages commonly jumped 7 percent, 8 percent or even 9 percent year-over-year."


What's up with the tepid wage growth in recent years? Why is the economy seemingly ignoring the law of supply and demand, which suggests that tighter labor markets should lead to increased pay for workers? Economists don't agree, but economists never agree. The New York Times came up with a list of six different factors, including declining unionization, which lowers wages; consolidation of businesses, which reduces competition; a lagging federal minimum wage (it's still at $7.25 nationally, although it's higher in some states like Michigan); globalization and automation; sluggish productivity, and outsourcing work. 

The Economic Policy Institute, a research center backed by organized labor, offers an alternative contributing factor, suggesting that wages aren't moving up because maybe the nation's employers aren't as hard-up for workers with in-demand skills as conventional wisdom suggests. "If there are skills shortages, we should see signs of faster wage growth for workers with needed skills,"  the EPI said in July. "This fast wage growth for skilled workers should push up average wages, not weigh them down. Since we continue to see anemic average wage growth, not just slow wage growth for select groups of workers, it’s clear that there is not a widespread shortage of the types of workers (i.e., those with the right skills) that employers need."