Hourly pay has risen just a smidgen above 2% a year since the economy began to grow again in 2009 following the Great Recession. And even though wage growth has sped up to 2.5% lately, pay usually increases 3% to 4% annually when the economy is as strong as it is now.
Here’s why paychecks may not be increasing as much as expected.
Boomers and millennials
The latest explanation to gain a foothold is this: Higher-paid baby boomers are retiring and being replaced by younger and less experienced workers who start at lower salaries.
The result is that average wage growth looks a lot worse than it really is. Pay is rising close to historic levels if boomer retirements are factored in, according to a recent study by the San Francisco Federal Reserve.
The boomer effect isn’t going away, either. “With so many of this generation still approaching retirement, the so-called Silver Tsunami will continue to be a drag on aggregate wage growth for some time,” the Fed study said.
Global labor market creates price controls
Americans are directly or indirectly competing in a world-wide pool of workers like never before. If foreign competitors use cheaper labor, American firms can’t raise their own wages too high, said Christopher Probyn, chief economist of State Street Global Advisors.
To be sure, some Americans are rolling in the dough. Highly educated workers, people with special skills and those who work in industries where labor is in tight supply fare best. Yet most Americans have to make do with pay raises that barely exceed inflation.
Not government-mandated controls, mind you, but market forces. Stiff global competition caps U.S. wages by preventing companies from raising prices to cover higher labor costs.
“Firms will pay more if they can pay more,” said Raymond James chief economist Scott Brown, “but they simply don’t have the pricing power.”
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In their last meeting, Federal Reserve officials pondered whether technological advances have spawned a new revolution in business models that dramatically lower costs, including the price of labor.
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These innovations could contribute to a long-term climate of low inflation that further induces firms to keep tight controls on worker pay.
Some economists contend the Great Recession of 2007-2009 made Americans less secure and more fearful of losing their jobs, leading them to move around less frequently and be less aggressive in seeking higher pay.
“The economic numbers tell us we’ve have recovered, but it still doesn’t feel that way to a lot of people,” said Cathy Barrera, chief economic adviser for the online jobs site ZipRecruiter.
This is the oldest and most widely accepted explanation. When workers produce more goods or services in one hour this year than they did last year, they are more valuable. Companies can afford to pay them more.
The problem is, productivity has been unusually weak. It grew an average of 1.1% from 2007 to 2016, down from 2.7% and 2.2% in the prior two economic cycles. Businesses have less incentive to boost pay if workers aren’t any better at their jobs.
“There’s no reason wages should be growing any faster than they are, “said Ellen Zentner, chief U.S. economist at Morgan Stanley. She thinks productivity and wages will eventually rebound, but there’s no telling when.