Stagnant Wages Are Crimping Economic Growth

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from The Wall Street Journal,

Employers Seem Wary to Raise Pay.

Americans are spending enough to keep the economy rolling, but don’t expect them to splurge unless their paychecks start to grow.

Four years into the economic recovery, U.S. workers’ pay still isn’t even keeping up with inflation. The average hourly pay for a non-government, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show.

Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth.

Economists blame three factors:

1. Economic growth remains sluggish, advancing at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%. That effectively has put a lid on inflation, which has been near or below the 2% level the Federal Reserve considers healthy for the economy.

2. Businesses are changing how they manage payrolls. Economists at the Federal Reserve Bank of San Francisco in a recent paper said that, in the past, companies cut wages when the economy struggled and raised them amid expansions. But in the past three recessions since 1986—and especially the 2007-2009 downturn—companies minimized wage cuts and instead let workers go to keep remaining workers happy. As a result, to compensate for the wage cuts that never were made, businesses now may be capping wage growth.

3. Globalization continues to pressure wages. Thanks to new technologies, Americans are increasingly competing with workers world-wide. “We are on a long-term adjustment, as China, in particular, but all developing countries, get their wages closer to ours,” said Richard Freeman, an economist at Harvard University.

The upshot: Even though rising home prices and stock values are making some people optimistic, many workers can’t push for higher pay—crimping their spending and potentially the recovery. “Workers feel like they have absolutely no bargaining power,” said Robert Mellman, an economist at J.P. Morgan Chase & Co.

To be sure, wages in some sectors have increased. Adjusted for inflation, nonsupervisory workers in education and health services have seen their pay rise 0.9% since June 2009. But the outlook for pay increases in many other sectors remains grim.

America’s car industry has undergone a major overhaul of its compensation system. As a result, new employees receive pay that can be around 50% less than older workers.

The long-term picture also isn’t encouraging. In a study published Monday, Cornell University economist Richard Burkhauser notes that demographic trends such as the aging of the American population will “drag down median income over the next two decades.”

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