The Wage Doldrums

One of the most important problems in the current economy is that, despite strong growth in labor productivity, hourly wages for most workers are not keeping pace with inflation. The source of the problem: a one-two punch of slower nominal wage growth for middle- and low-wage workers and faster inflation.

Though the decline in jobs ended in the second half of 2003, even today slack remains in the job market. Comparisons to past recoveries provide historical context. For example, employment grew by 1.5% in 2005, compared to a twice-as-fast 3.1% average at the same stage of past recoveries.

This relatively weak labor demand dampens nominal wage growth, a problem only compounded by the accelerated rate of inflation in 2005 (largely due to increases in energy prices).

The result: stagnating or falling real wages for most workers.

The momentum of wage gains that began in the tight job market of the latter 1990s kept real wages rising through 2003. But, as shown in the charts below, weak job performance since 2001 ultimately caught up with nominal wage growth to the detriment of middle- and low-wage workers. Only at the top of the wage scale is there evidence that faster productivity growth is benefiting workers through higher real hourly wages.

Along with the remaining slack in the job market, other factors limiting the bargaining power of middle- and low-wage workers include: the erosion of union power; the fall in the real value of the minimum wage; the growing imbalance in international trade; and the offshoring of white-collar jobs.

Source: Author’s analysis of CPS earnings files; 2005 data are through November (we calculated wages by decile-10th percentile, 20th, 30th, etc.-for the first 11 months of 2004, and applied the growth rates of the 2004 and 2005 data through November to the full-year 2004 data).

JARED BERNSTEIN is an economist at the Economic Policy Institute.