Why are American Wages Refusing to Grow, Despite Economic Recovery?

On the surface, these look like exciting times for the American labor force as American economy is on the rise. The Bureau of Labor Statistics (BLS) estimates a low unemployment rate of 3.4%, and predicts that 8.3 million jobs will be added over the next decade (2021–2031). 517,000 of these jobs were added in January this year alone. Job vacancies have also witnessed the steepest decline yet since April 2020. Yet, despite a 61.8% increase in productivity over the past four decades (1979 to 2020), wages have grown by a mere 17.5%.

In other words, though the labor market is growing stronger, wages have not grown as quickly as they have at similar times in the past. In fact, real average hourly wages (adjusted for inflation) have actually declined by 1.1% over the past year (December 2021 to December 2022).

We can no longer blame the “technology takeover”

Traditionally, globalization and technology have been regarded as the primary causes of sluggish wage growth. In the 1980s and 1990s, economists argued that technology was taking jobs, making “unskilled” workers (those without college degrees) increasingly dispensable for employers. In contrast, college graduates started becoming “more valuable” in the burgeoning knowledge economy.

Despite demand, wages continued to decline as the rate at which college graduates entered the economy slowed. This was particularly prominent in the lower half of the income distribution curve (such as factory workers, nurses, and teachers), while workers near the higher side of the spectrum, such as software engineers, started witnessing increased wages.

Who holds the cards, employer or employee?

The technology thesis was largely based on a standard, unidimensional economic analysis: As the demand for less-skilled workers declined, their wage growth slowed as well. But, over the past few years, many economists have started shifting away from this explanation and focusing more on the power dynamics between employers and workers, rather than on the interplay of supply and demand in the long run.

Economists are now suggesting that labor dynamism – the rate at which people change jobs – is also key to the ongoing wage decline. Americans today are switching jobs less frequently than they did before, though job switching is one of the most effective ways to boost take-home pay growth. Many Americans choose not to switch their jobs due to a desire for stability, and others stay put due to limited job mobility. Whatever the reason, in many local markets, it would appear that companies leverage a lack of competition to control wage growth.

The role of the government

Economists also believe that the government may be to blame. Policy decisions that are tolerant of unemployment and supportive of employers fighting unions, trade deals that force employees to compete with cheaper labor in other countries, and employment contracts that strongarm workers into staying back at their jobs, etc. lead to wage suppression. Such tactics also deny workers the bargaining power to seek increased wages.

There is also the Federal Reserve, which has, since 1979, prioritized consistent, stable inflation rates – at the expense of employment. As a result, it often ends up tolerating excessive unemployment for extended periods of time in order to avoid higher-than-desired inflation rates. With mounting inflation rates come soaring consumer prices, which chip away at modest wage gains and bring workers right back to square one. This then becomes a vicious circle, with the government scrambling to curb accelerating inflation, reflecting in the interest rates, and economic stimulus packages that it settles on.

Ironically, the COVID-19 pandemic may have had a positive impact on wages

The pandemic – and the Great Resignation that followed it – led to a few surprising gains in wage growth. According to the US Bureau of Labor Statistics, nearly 25% of private sector businesses in the country affected pay raises due to the pandemic.

But what does that tell us about the new reality? Will wages remain flat for the foreseeable future, or will one of the many forces at play succeed in pushing the needle of wage growth one way or the other? It remains to be seen. With so many variables at play, it’s hard to predict which will dominate – and whether it will be responsible for two-thirds or one half of the slowdown in wage growth.

Suffice to say that none of these factors are considered minor, and that there is no single wage-growth panacea. It will take incremental policies and reforms – ranging from higher minimum wages to looser fiscal policies and increasing worker bargaining power – to reestablish and nurture the conditions that drive robust wage growth.

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