5 reasons pay isn’t higher with low joblessness
Washington — Eight years after the Great Recession ended, the economy is steadily churning out jobs, and the unemployment rate is at a 16-year low.
Yet for most Americans, a key measure of economic health — pay growth — still lags behind pre-recession norms.
That isn’t likely to change Friday, when the Labor Department will release the U.S. jobs report for June. Economists have forecast that employers added a solid 177,000 jobs last month and that the unemployment rate remained 4.3 percent, the lowest level since 2001. The job market, in other words, has proved itself resilient.
Pay raises are another story, and a puzzling one. Analysts expect Friday’s report to show that average hourly wages rose just 2.6 percent from a year earlier, according to data provider FactSet. That’s well below the 3 percent to 3.5 percent average pay raises that have been typical in a healthy economy.
The Federal Reserve monitors the barometers of wage growth for any evidence that inflation might be starting to pick up. Inflation has remained persistently low since the recession ended — lower even than the Fed’s 2 percent target rate, which it regards as consistent with a healthy economy.
Here are five reasons why pay growth has lagged chronically behind job growth for most of the recovery from the recession:
Baby boomers out, younger coming in
One drag on average salaries is demographic: Higher-paid baby boomers are retiring in droves, and in many cases they’re being replaced by lower-paid younger workers. Roughly 10,000 Americans turn 65 every day. And while not all retire, most do.
For younger workers, especially those who lack advanced education, incomes have declined over the past four decades. A typical American in the 25-to-34 age range earned $34,800 in 2016, according to the Census Bureau. Once you adjust for inflation, that’s less than in 1975, when the typical worker in that age group earned $36,900.
Asking for a raise is never easy. It’s even harder when memories remain fresh of a time when nearly 9 million people were thrown out of work and the unemployment rate rocketed to 10 percent, as happened during and after the 2008-2009 Great Recession. Even now, some people remain reluctant to approach their boss and ask to be paid more.
One measure of this trend is the Conference Board’s consumer confidence survey. The survey asks people whether they expect their income to increase within six months. The more likely they are to expect a pay gain, the more likely they are to ask for a raise if they haven’t received one.
Until 2014, more Americans actually expected their incomes to fall rather than rise. And the proportion of Americans who expected a raise didn’t reach pre-recession levels until late last year.
“People are out of practice when it comes to asking for higher pay,” said Mark Zandi, chief economist at Moody’s Analytics.
Wages got stuck
Even as they slashed jobs during the recession, employers generally refrained from cutting pay for their remaining workers. Economists say that isn’t surprising: Employers tend not to cut pay for workers who survive a round of layoffs to avoid further demoralizing a staff.
But that doesn’t mean employers didn’t want to lower pay during the recession, given their falling revenue and profits. So to offset the cost of leaving wages untouched, many employers have withheld raises as the economy has improved. Economists at Bank of America Merrill Lynch have calculated that the share of workers whose wages didn’t budge — up or down — rose sharply during the recession and still hasn’t returned to healthy levels.
Moving down the pay scale
The recession not only sent unemployment soaring. It also inflicted pain on other people who weren’t technically unemployed. One gauge measures the proportion of part-time workers who would prefer full-time jobs — a category that soared during the recession. Another barometer counts people who have given up their job hunts and so are no longer counted as unemployed.
Millions of those Americans have gained full-time jobs in the past eight years, but in many cases at much lower pay. The Federal Reserve Bank of San Francisco calculated last year that 80 percent of those formerly part-time workers who obtained full-time jobs did so at wages below the national median level of pay.
And people who are unemployed or who have stopped looking altogether are typically hired at wages about 30 percent below the median pay, research has found.
A matter of time
Many economists still expect wage growth to pick up in the coming months. They argue that a basic rule of economics still holds: As the supply of workers falls, its price (i.e., paychecks) will rise — eventually.
“It just takes time,” Zandi said. “A tight labor market will lead to greater wage growth.”
With unemployment at an uncommonly low 4.3 percent, many employers have complained that they can’t find enough qualified workers. There are more than 6 million available jobs — double the number during the recession and a record high.
At some point, all those trends should compel businesses to offer higher pay, economists say.
But many workers may not believe it until they see it.
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