Why Aren't Wages Outstripping Inflation?

Things appear to be looing good on the economic front: The stock market is up over the past year, profits have been rising and the U.S. economy has been growing for four years. Yet, wages for many American workers have been stagnant. To find out why, Renee Montagne talks to David Wessel, economics editor of The Wall Street Journal.

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DAVID GREENE, HOST:

This is MORNING EDITION, from NPR News. Good morning. I'm David Greene.

RENEE MONTAGNE, HOST:

And I'm Renee Montagne.

The stock market is up over the past year. Profits have been rising. The U.S. economy has been growing for four years now, yet wages for many American workers have been stagnant.

As Labor Day approaches, we decided to ask David Wessel to explain why this is. He's economics editor of The Wall Street Journal.

MONTAGNE: Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: Give us the basics. Wages are supposed to grow, and historically they have done that faster than inflation. So what's happening?

WESSEL: Well, you're right. Since the end of World War II, wages generally have risen faster than inflation. That's why we have more goods and services than our grandparents did. And as recently as the late '90s - which were a pretty good time for the U.S. economy - that was happening. In the in past year, though, average hourly earnings have risen 1.9 percent. But consumer prices have risen 2 percent, which means when you adjust for inflation, wages haven't gone up at all. There are broader government measures that factor in the cost of wages and benefits to employers, and they've gone up roughly the same amount. And it isn't just one bad year. The typical man between ages 25 and 54 is making less today - adjusted for inflation - than a comparable man was in 2000. For women, the picture's better. Their wages, on average, have gone up a bit.

MONTAGNE: But if the economy is getting better - even if slowly getting better - why aren't wages rising faster?

WESSEL: Well, there are really two things going on here. One is the temporary. There's a lot of unemployment. So employers don't have to pay more, because people can't go and get a better job somewhere else, and there's a lot of workers available. In some industries, workers are shell-shocked. We went through this terrible recession. They're just glad to have jobs. Now, there are pockets of worker shortages, particular skills and the like, and their wages are going up.

But then there's this long-term forces that really preceded the Great Recession. Employers aren't giving bigger raises, because they have to spend more on health care. Lots of things have happened that weakened workers' bargaining power. Unions have a lot less clout now than they did 10 or 15 years ago, and many of them have agreed to contracts where new hires make less than existing workers. A newly hired autoworker, for instance, earns about $15 an hour. Veteran workers earn about $28 an hour.

And a lot of this has to do with globalization, what makes it possible for companies to move their work overseas, or use that threat to get workers to settle for lower wages. And it has to do with technology, which allows companies and other businesses to replace workers with machines or computers, and that also can put downward pressure on wages.

Now, to be clear, for some workers, wages have gone up. For people at the top, there's a global market for talent, CEOs, rock stars, investment bankers, NPR hosts, their wages have managed to go up. But they really are the exceptions in our economy at the moment.

MONTAGNE: Of course, for most individual workers, this is not so great. But what about the larger economy?

WESSEL: Well, consumers are a big force in the American economy. And in the mid-2000s, a lot of them managed to borrow money - credit cards, home equity loans and the like - so their spending could go up faster than their wages did. But that's over. That credit is harder to get now. So, to a very large extent, companies that sell to consumers - particularly to that large number of lower and middle-class families - their business is constrained by the fact that people don't have as much money, a function of how many of them have jobs and what their wages are.

On the other hand, the combination of rising wages in China and the stagnant wages here is making the U.S. a more attractive place to produce from many companies. That's one reason lower labor costs at U.S. auto companies are doing so well, selling so many cars, putting workers on three shifts and stuff like that. So there are some benefits for producing here. But if you depend on selling to consumers, you don't have the money.

MONTAGNE: Well, are there any, say, levers to pull, changes in policies that could produce faster increases in wages and incomes?

WESSEL: There are not any easy ones. The forces of globalization and technology are strong. You could raise the minimum wage. The president has proposed that. Some of the unions are calling for strikes of fast food and low-wage retail workers. In the end, though, the best solution is the old-fashioned one: a faster growing economy. Art Okun, a late economist, used to call a high pressure economy, where demand for workers are strong and it pushes up their wages.

MONTAGNE: David, thanks very much. David Wessel is economics editor of The Wall Street Journal.

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