Last week, we looked at how the government compiles statistics on job creation and wage trends, and observed that the unemployment rate has reached a 17-year low of 3.9 percent. As we noted, that number is below the level considered "full employment," normally a harbinger of higher wages in response to labor shortages. But this has (so far) not materialized, and in fact average private sector workers are not seeing much more in their paychecks after inflation than they did four decades ago. Real wages have increased by just 0.2 percent per year since 1973.
The picture is complex, but three key factors are worth highlighting: diminished share of profits to labor, increased income inequality, and flagging growth in productivity.
Christopher A. HopkinsIncome generated by business enterprises is divided between suppliers of labor (workers) and suppliers of capital (investors). For much of modern economic history, labor's share of income has hovered around 62 percent. But since 2000, that number has declined to 57 percent, leaving a smaller pie to divide up among wage earners. This trend has many causes. Automation and globalization that demand more capital lead the list, but other factors are also in play. The decline in union representation, for example, has diminished workers' bargaining power. Since 1956, the fraction of private-sector union representation has plummeted from 26 percent to 5 percent today, so it is possible that labor's share of income was higher during the '60s and '70s than the equilibrium level.
Next, it is hardly news that inequality of wealth and income has been growing steadily for decades. The aforementioned income pie has been divided up quite unequally, and the disparity continues to widen. According to a Brookings Institution analysis of Labor Department data, the top quintile (one-fifth) of wage earners saw their pay increase after inflation by 27 percent between 1979 and 2016, while the middle fifth got only a 3 percent raise. And workers in the bottom quintile actually suffered a 1 percent decline over those same 37 years. Some contributing factors include increased concentration in fewer, larger corporations, a shift in emphasis to increasing shareholder returns, and an alarming decline in new business formation. But clearly a major element is a misalignment of skills and inadequate education and training for workers in the lowest income quintiles that would offer hope for advancement.
Finally, economists are perplexed by the productivity conundrum. Ultimately, higher wages depend on the ability of each worker to produce more output per hour of work and per dollar of capital invested. The United States has been mired in a great productivity slump for some time. The average increase in output per worker is growing by just 1 percent, about half of the rate we enjoyed through the '80s and '90s and a third of the post-war average through 1973. Tyler Cowen of George Mason University estimates that had the pre-1973 rate of productivity increase been maintained, the median household in the U.S. would be earning $40,000 more than it currently receives. Understanding the productivity lag is rightly high on the priority list of economists and policymakers.
Other factors have been suggested for stagnant wages: decreased mobility, for example, as workers are half as likely to move for a job as they were in 1990. And demographics surely contribute: older, higher-paid boomers departing the workforce to be replaced by younger, lower-paid workers pull down the averages. And at the margin, the minimum wage has not kept up with inflation, dragging down the lower end of the curve.
The problem is difficult but not intractable, and recognition is the first step.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.