Home / Blog / Article

September 24 2014

Is Wage Stagnation the New Normal?

Rachel DiCarlo Currie

According to Census Bureau data released on September 16, America’s median household income -- as measured in constant 2013 dollars -- was lower last year ($51,939) than it was in 1989 ($52,432). Since 2007, when the Great Recession began, it has declined by 8 percent.

It’s worth remembering that, when the Census number-crunchers measure “income,” they measure pre-tax money income, thereby leaving out refundable tax credits, non-cash government transfers (Medicare, Medicaid, food stamps, housing assistance, etc.), employer-provided fringe benefits (such as health insurance), and capital gains. It’s also worth remembering that, as analysts from the Center on Budget and Policy Priorities have noted, “Census’s standard income statistics do not adjust for the size and composition of households.”

Moreover, those statistics do not control for retirees, and Manhattan Institute scholar Scott Winship has rightly emphasized that “it is impossible to get an accurate read on trends in market income concentration when retirees (with little to no market income) are included in the data (as they always are). The share of retirees has been growing for some time, and that puts downward pressure on the market income trend.” In addition, the Census Bureau uses an inflation measure that, as Winship has written, “fails to fully account for the ability of consumers to substitute between goods and services as their relative prices change.” Finally, we should keep in mind that long-term trends in household consumption look very different from trends in household income: Economists Bruce Meyer of the University of Chicago and James Sullivan of Notre Dame estimate that, in 2010, America’s consumption-poverty rate (4.5 percent) was 10.6 percentage points lower than the Census income-poverty rate (15.1 percent).

Still, there’s no question that wage growth has been relatively weak for a long time, and especially since the recession. That helps explain why, according to an August 2014 Pew Research Center survey, 56 percent of American adults believe their family income is “falling behind the cost of living.”

AP economics correspondent Christopher Rugaber offers a thoughtful analysis of the problem:

“Economists are flummoxed by the way the historical relationship between pay and unemployment has eroded since the recession ended. Based on historical trends, the steady drop in unemployment should have raised inflation-adjusted wages by 3.6 percent by June, according to researchers at the Federal Reserve Bank of Chicago. That’s because employers have had to fill jobs from a smaller pool of unemployed people -- a trend that normally forces them to pay more.

“Instead, overall inflation-adjusted wages have essentially flattened since 2009.

“So why has overall wage growth been so weak? Economists point to several factors.

“The biggest is that there are still too many people desperate for work than is typical for a healthy economy. That makes it easier for employers to fill jobs without raising pay.

“There are 227,000 fewer people with jobs than in November 2007, just before the recession began. Yet the working-age population is up 15.3 million since then. That’s kept the number of unemployed elevated: 9.6 million Americans, up from 7.6 million when the recession began.

“But it’s not just unemployment that’s holding down wages. The many part-timers who would prefer full-time work are also competing with those who are out of work. There are 7.2 million involuntary part-timers, up from just 4.6 million in late 2007.

“Given these trends, people who do have jobs have less leverage to demand higher pay. Sixteen percent of working Americans say their pay hasn’t budged in the past year, up from 11 percent before the recession, according to research by Bank of America Merrill Lynch.

“In addition, fewer startup companies are being created, holding back hiring. In the final quarter of 2013, new companies created just 1.3 million jobs, down from an average of 1.75 million in the 1990s, according to government data.

“Fewer startups and fewer quits have reduced what’s called job-market ‘churn.’ Economists liken churn to musical chairs: When people quit or new jobs are created by startups, more positions open for the unemployed or for workers seeking higher pay.”

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
Follow us