A Decade of Flat Wages

Portside Date:
Author: Lawrence Mishel and Heidi Shierholz
Date of source:
Economic Policy Institute

The nation’s economic discourse has finally shifted from talk of “grand bargain” budget deals to a focus on addressing the economic challenges of the middle class and those aspiring to join the middle class. Growing the economy from the “middle out” has become the new frame for discussing economic policy. This is long overdue; in our view, an economy that does not provide shared prosperity is, by definition, a poorly performing one. Further, such an economy will not provide sustainable growth without relying on consumption fueled by asset bubbles and escalating household debt. The collapse of the housing bubble and the ensuing Great Recession have laid bare the consequences of this model of unbalanced growth.

The revived discussion of strengthening the middle class, however, has so far failed to drill down to the central problem: The wage and benefit growth of the vast majority, including white-collar and blue-collar workers and those with and without a college degree, has stagnated, as the fruits of overall growth have accrued disproportionately to the richest households. The wage-setting mechanism has been broken for a generation but has particularly faltered in the last 10 years, once the robust wage growth of the late 1990s subsided. Corporate profits, on the other hand, are at historic highs. Income growth has been captured by those in the top 1 percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector (for more on wage and income growth among the top 1 percent, see Bivens and Mishel 2013).

President Obama’s July 24 speech in Galesburg, Ill., marking the kickoff of the White House’s “A Better Bargain for the Middle Class” initiative, illustrates both the best of this recent focus on the middle class and the failure to adequately acknowledge and address the economy’s failure to broadly raise wages. The president appropriately looked back in time, noting:

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain—a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.

And he correctly identified what broke down:

But over time, that engine began to stall. That bargain began to fray. . . . The link between higher productivity and people’s wages and salaries was severed—the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.

However, when it came to strengthening the middle class, the president was too optimistic. Aside from advocating an increase in the minimum wage, the president overlooked what it will take to solve the wage problem, saying:

With new American revolutions in energy, technology, manufacturing, and health care, we are actually poised to reverse the forces that have battered the middle class for so long, and rebuild an economy where everyone who works hard can get ahead.

Innovations in energy, technology, manufacturing, and health care are undoubtedly important. However, in and of themselves, they will not reestablish the broad-based wage growth and improved job quality needed to generate and sustain middle-class income growth. Nor will they, on their own, permit access to a rising middle class for those now left behind.

EPI’s The State of Working America, 12th Edition (Mishel et al. 2012) provides a comprehensive assessment of recent decades’ wage and benefits trends and an extensive analysis of the causes of wage stagnation and wage inequality. In this paper we document the economy’s continuing failure to provide real wage gains for most workers. We track wage trends (and, where possible, compensation trends, which include not just wages but also fringe benefits such as health care and pensions) using both employer-based and household-based survey data. We focus primarily on trends since 2007, the year the Great Recession began. We generally examine year-over-year trends using calendar years, though to assess the most recent trends we also include year-over-year trends using just the first half of each year. We also discuss these trends in the context of patterns since 2000, as the 2000–2007 business cycle—and especially the recovery years of that business cycle, 2002–2007—were characterized by dismal wage growth. In some cases we provide data going back to 1979, as most workers have experienced weak wage growth for more than three decades.

This paper’s key findings include:

Trends in average hourly wages and compensation in employer-based surveys

We first look at wage and compensation trends using data drawn from the available surveys of employers, sometimes referred to as establishment data. All of the establishment-based series that provide up-to-date national measures of wage and/or compensation trends are presented in Table 1.

It should be noted that the wage and compensation data in this table are averageswhich are all that are available in the establishment data. Averages can be misleading when data are heavily “skewed” at one end. This happens to be the case for U.S. wages and compensation; those at the top have extremely high earnings, thereby pulling up the average. Thus, the average is actually not an accurate measure of the typical worker’s earnings. Later, when we turn to an examination of household data, we are able to look at medians, which are a direct measure of the earnings of the typical worker (i.e., the person in the middle of the distribution). The data demonstrate, however, that across all of the available establishment-based measures, even average wages and compensation have grown anemically, if at all, for more than a decade.

Table 1

Average real hourly compensation and wages, 2000–2013

      Labor Productivity     and Costs program (LPC) Employment Cost Index (ECI) Current Establishment Survey (CES) Employer Costs for Employee Compensation (ECEC)
   Productivity (output per hour of all persons)   Total economy Private sector Private sector Private sector
  Inflation (CPI-U) Compensation Compensation Wages Wages Production/ nonsupervisory wages Compensation* Wages*
  Index: 2000=100 Index: 1982–1984=100 Index: 2000=100  2012 dollars
2000 100.0 172.2 100.0 100.0 100.0 N/A $18.69 $27.10** $22.13**
2007 116.0 207.3 109.4 105.5 102.4 $23.22 19.30 29.04 23.24
2012 124.9 229.6 110.4 105.5 101.8 23.50 19.76 28.85 23.10
Period changes              
2000–07 16.0% 20.4% 9.4% 5.5% 2.4% N/A 3.3% 7.2% 5.0%
2007–12 7.7 10.7 0.9 0.0 -0.7 1.2% 2.4 -0.6 -0.6
2000–12 24.9 33.3 10.4 5.5 1.8 N/A 5.7 6.5 4.4
Recovery years              
2009–10 2.5% 1.6% 0.5% 0.3% 0.0% 0.1% 0.7% -0.7% -0.9%
2010–11 0.3 3.2 -1.1 -1.0 -1.5 -1.0 -1.0 -1.1 -1.3
2011–12 1.0 2.1 0.2 -0.2 -0.3 -0.2 -0.6 -0.2 -0.1
Most recent trends***              
2011–12 1.3% 2.3% -0.5% -0.4% -0.5% -0.5% -0.8% -0.4% -0.4%
2012–13 0.0 1.5 -0.3 0.3 0.3 0.5 0.3 -0.6 -0.7

* Authors' own calculation of compensation and wages from ECEC data. "Wages" to include pay such as paid leave and supplemental pay to reflect W-2 wages. "Compensation" is adjusted by deflating insurance costs by the CPI-U Medical Care and the non-insurance costs by the CPI-U-RS.
** The ECEC for 2000 only reflects the 1st quarter because ECEC only began collecting data for all four quarters in 2002.
*** Year-over-year growth rates are the change from the 1st half to 1st half, except for the ECEC, which is from the 1st quarter to 1st quarter.

Source: Authors' analysis of the Bureau of Labor Statistics unpublished Total Economy Productivity data, and Consumer Price Index, Employment Cost Index, Current Employment Statistics, and Employer Costs for Employee Compensation public data series

Overall trends during the Great Recession and its aftermath

During the Great Recession and its aftermath (i.e., between 2007 and 2012), economy-wide productivity grew 7.7 percent. Table 1 shows that across all available measures, wage and compensation growth lagged far behind productivity. Compensation grew 0.9 percent as measured by the Labor Productivity and Costs (LPC) program, was flat (grew 0.0 percent) as measured by the Employment Cost Index (ECI), and fell 0.6 percent as measured by the Employer Costs for Employee Compensation (ECEC) program.1 In the ECI, wage growth was even weaker than compensation growth, declining 0.7 percent, and in the ECEC, the drop in wages matched the drop in compensation, declining 0.6 percent. As for the Current Establishment Survey (CES), which is the survey used to track payroll job growth each month, there are two measures of wage growth available: one for all private-sector workers and one for private-sector “production and nonsupervisory workers” (who comprise 82 percent of private-sector payroll employment, excluding typically higher-paid managers and supervisors). Average hourly wages of all private-sector workers and of production and nonsupervisory workers increased modestly between 2007 and 2012, by 1.2 percent and 2.4 percent, respectively.

The most recent data, covering in most cases changes between the first half of 2012 and the first half of 2013 (the last line of data in Table 1), show that wage and compensation growth remains bleak. Compensation as measured by the LPC program fell 0.3 percent, whereas it grew 0.3 percent according to the ECI and dropped 0.6 percent according to the ECEC. Wages grew 0.3 percent as measured by the ECI, dropped 0.7 percent as measured by the ECEC, and increased only 0.5 percent and 0.3 percent for all private-sector workers and for production and nonsupervisory workers, respectively, in the CES. In short, this is what wage and compensation stagnation looks like.

However, these latest data were largely an improvement from the prior year’s data (2011–2012), which show wages and compensation declining according to every measure. Unfortunately, it is unlikely that the acceleration in wages and compensation over the past year will continue. First, much of this acceleration of real wage growth was due to a drop in inflation between the two periods (from 2.3 percent to 1.5 percent, as shown in Table 1). This means there was little acceleration in nominal wage growth over this period. Additionally, a substantial part of the slowdown in inflation was due to a slowdown in the prices of food and energy, which are volatile from year to year.2 These prices are likely to bounce back, pulling down the growth of real wages moving forward (though core inflation, which excludes the volatile food and energy items, is expected to remain subdued due to the weak economy). Furthermore, with continued high unemployment, wage growth is unlikely to accelerate much in the next few years. With so few outside job opportunities, employers simply do not have to offer strong wage increases to get and keep the workers they need.

Overall trends since 2000

Another key point that Table 1 demonstrates is that wage and compensation growth was weak even before the Great Recession began. Between 2000 and 2007, the last full business cycle before the start of the Great Recession, productivity grew 16.0 percent. However, compensation grew by just 9.4 percent over this period as measured by the LCP program, by only 5.5 percent in the ECI, and by just 7.2 percent in the ECEC. Wages grew just 2.4 percent as measured by the ECI, 5.0 percent as measured by the ECEC, and 3.3 percent for production and nonsupervisory workers in the CES.

The weak wage and compensation growth in the 2000–2007 business cycle, combined with the even weaker growth in the Great Recession and its aftermath, mean that average wage and compensation growth was far outpaced by productivity growth between 2000 and 2012. Furthermore, wage and compensation growth in the first few years of this period was still being buoyed by the momentum of the strong wage and compensation growth of the late 1990s. Figure A shows year-by-year productivity growth along with compensation growth as measured by the ECI and the ECEC since 2000. It shows that there has been no sustained growth in average compensation since 2004. The stagnation began even earlier, in 2003, when considering wages alone. Since 2003, wages as measured by both the ECI and the ECEC (not shown) have not grown at all—a lost decade for wages.

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Source URL: https://portside.org/2013-09-01/decade-flat-wages