ThinkProgress

Economists throw cold water on pundits’ celebration over wage growth

English teacher Kathy Hansen, casually dressed in jeans and a t-shirt, hands out papers during class at W.T. Woodson High School on Thursday, February 6, 2014, in Fairfax, VA. A group of teachers is demonstrating for better compensation by "dressing down." CREDIT: Jahi Chikwendiu/The Washington Post via Getty Images

Unexpected wage growth was the detail of the monthly jobs report that grabbed headlines last Friday, with average hourly earnings rising 0.3 percent from a month earlier and 2.9 percent from a year earlier. That would mean this was the strongest wage growth since mid-2009. President Trump has bragged about this repeatedly over the last week.

But the reality is this: in the long term, wages haven’t moved as much as expected for an economy with such low unemployment. Economists told ThinkProgress that it’s wise to be cautious about celebrating wage growth right now. 

“Despite a bump in wages this report, the wage growth for non-supervisory/production workers has remained relatively constant and did not bump up this period. These are the workers who seem to be benefiting the least from the strong economy,” said Sandra Black, a nonresident senior fellow with the Economic Studies program at Brookings and professor of economics at the University of Texas at Austin.

Jay Shambaugh, a senior fellow in Economic Studies at the Brookings Institution and professor of economics and international affairs at George Washington University, said that if the minimum wage hike from 18 states in January had really affected wages the way people hoped, the numbers should have reflected that. But this month, the numbers did not show that, although Shambaugh said it’s possible it is a seasonal adjustment.

“It’s right around where it has been, so if you thought it was the minimum wage hike, you would have expected it to hit the lower wage workers and even more disproprotionately than the high-wage workers,” Shambaugh said he expected to see a significant change for leisure and hospitality workers, “which is really where you think you’re going to see the minimum wage jumps hit because their average wages are so much lower,” Shambaugh said. “But on a month-to-month basis, their wages didn’t go up much at all,” Shambaugh said.

The long-term picture for wage growth has been grim. U.S. wages were only 10 percent higher in 2017 than in 1973, and according to the Hamilton Project, it has mostly benefited folks at the top of the income distribution. When looking at real wage gains — or wages adjusted for inflation — 0.7 percent a year since the beginning of the Great Recession isn’t enough for people’s living standards to rise, Shambaugh said.

A number of factors have contributed to this stagnation, including globalization, declines in unions and other labor institutions, technological changes, and a decrease in what is called business dynamism, or the expansion, contraction, failure, and creation of businesses that both creates and kills jobs. Workers are also switching jobs at a lower rate. Lack of worker mobility has been another factor in stagnant wages. Workers have been less likely to move to new places or to new jobs. Americans who moved from one state to another fell from 3.8 percent in 1990 to less than 2 percent in 2016. The new tax law — which for the next eight years won’t allow people to deduct moving expenses — isn’t going to help. 

Recent research shows how labor market monopsony, or buyer power among employers, affects workers’ wages. When employers aren’t competing with each other for workers, they can pay workers lower wages and too often, workers are stuck with them. A 2017 study looked at concentrated labor markets, or markets where only a few firms dominate hiring, and found a decline in wages. Using data from CareerBuilder.com, researchers calculated labor market concentration for more than 8,000 occupational labor markets and found that going from the 25th percentile to the 75th percentile in concentration is associated with a 15 percent to 25 percent decline in wages.

“What we’ve been looking at more and more is just the idea of why if there is a strong market, strong economy, why aren’t workers benefitting? There is this idea that there is market power that workers don’t have and that firms have power over the workers,” Black said. “When we teach economics, we think about a perfectly competitive labor market, where if a firm offered you five cents less, you would leave it and go to the firm that offered you 5 cents more. Of course, the real world does not work that way.”

There are a few different reasons why Americans aren’t moving, some of which are related to the financial struggles of the Recession and the fact that many regions of the country are attracting a wider range of industries, so that Americans don’t necessarily need to move. But mobility has been on the decline for decades and government policies play a role. Economists told City Lab that the mortgage tax credit inhibits mobility, since homeowners are less likely to move than renters and that subdivision regulations and zoning laws limit the housing supply and make it difficult for people to afford to move to those cities for jobs. A rise in licensing for professions on the state level also creates barriers for workers who would otherwise move.

Marshall Steinbaum, one of the authors of the 2017 study and research director and fellow at the Roosevelt Institute, said that policy toward the labor market is “inconsistent.” Authorities in charge of enforcing antitrust policy have indicated they don’t see employers as a threat to competition in the labor market and instead see the threat to competition as coming from workers who pursue collective bargaining. The U.S. submission for the 2015 Organisation for Economic Cooperation and Development’s global forum on competition reads, “The U.S. Federal Trade Commission and the Antitrust Division of the Department of Justice do not consider employment or other non-competition factors in their antitrust analysis.” A 2017 amicus brief from the Justice Department’s Antitrust Division opposed Seattle’s grant of collective bargaining rights to drivers for ride-sharing companies. The brief mentioned antitrust law, which Steinbaum wrote “harks back to disturbing misreadings of antitrust law from early in its history.” It seems extremely unlikely that corporate tax cuts will make their way back to workers’ wages in any meaningful way either. According to the Economic Policy Institute, a number of studies have shown that historically, changes to the corporate tax have not resulted in significant changes to wages.

The outlook for wage growth looks particularly grim when you consider the weakening of labor rights so far under the Trump administration. The National Labor Relations Board set back a number of labor wins last year and soon, and the U.S. Supreme Court will soon decide whether public sector unions can require non-union workers to pay fees for collective bargaining costs. Unions are not optimistic the court will decide in their favor and are preparing for it through more aggressive internal organizing.

“It is hard to measure how much bargaining power workers have, but unions have declined and labor share of productivity is declining, so we know that something is going on and it is consistent with this idea that workers have declining bargaining power,” Black said.