Friday, August 23, 2013

Falling Behind - Stagnant Wages in Middle Class America

Updated September 13, 2013

Many of us have suspected that the middle class has been left out of the economic benefits that have allegedly accrued over the past decade particularly when it comes to wage growth when compared to those that dwell at the top of society's heap.  A study by Lawrence Mishel and Heidi Shierholz of the Economic Policy Institute examines what has happened to wages and benefits over the past decade and how workers' real wage gains have evolved particularly since the "end" of the Great Recession.  In this posting, I will also look at one of the key measures of the perceived health of the economy, the University of Michigan Consumer Sentiment measure and how its current level is likely connected to wage growth.

The authors looked at wages from two perspectives:

1.) Using establishment data supplied by surveys that are employer-based.

2.) Using household data supplied by surveys that are household-based.

Let's open by looking at a graph that compares real average hourly compensation growth and productivity growth between 2000 and 2013:

As you can quickly see, since 2004, real growth in hourly compensation has been stagnant no matter what measure is used.  In the period between 2000 and 2007, productivity grew by 16 percent whereas compensation grew by between 5.5 percent and 7.2 percent depending on the measure used.  Since the Great Recession in the years between 2007 and 2012, productivity grew by 7.7 percent whereas real growth in compensation in the private sector "grew" by between 0 percent and -0.6 percent depending on the measure used.   

Now, let's look at the impact of educational attainment on real wage growth.  For those of us that are baby boomers, the mantra of the necessity of getting a college or university education to succeed in life was drilled into us from the early years.  While a post-secondary education does provide a wage premium, that premium has stalled at between 40 and 50 percent since the late 1990s as shown on this graph:

Both college-educated genders have seen the premium stall at about 45 to 46 percent for women and 48 to 49 percent for men since before the Great Recession.  White collar managers and professionals have seen real wage increases of 4.7 percent between 2001 and 2012.  By comparison, blue collar construction and natural resource workers have seen real wage increases of 5.9 percent and installation and maintenance workers have seen real wage increases of 5.3 percent over the same time frame.  Over the past year, all workers have seen real wage increases of only 0.3 percent with white collar managers and professionals  seeing real wage increases of 0.3 percent and blue collar construction and natural resource workers seeing real wage increases of 0.1 percent.  The minute difference in real wage growth between the two groups is rather stunning even in light of the wage premium.  It certainly makes one question the wisdom of accruing tens or hundreds of thousands in debt for a wage gain that is not growing.

So, in all of this, who is benefitting the most from real wage increases (as though you can't guess).  Here's the answer:

Since the Great Recession, all income groups under the 70th percentile (i.e the lower and middle classes) have seen a decline in real wage growth and, in the case of wage earners in the bottom 20 percent as shown in the lightest blue line, they have seen their wages shrink by 5.5 percent in real terms between 2007 and 2012.  The only wage group that saw increasing real growth in wages was the top five percent (the 95th percentile as shown in the darkest blue line).  This group has seen their real wages rise by 11 percent between 2007 and 2012 as shown on this chart:

Over the past year (2012 to 2013), wage earners in the 50th percentile and greater (excluding those in the 10th percentile) have seen real but very modest wage gains ranging from 0.6 percent to 2.0 percent.  Those on the losing end who fall in the 20th to 40th percentile saw real wage contractions ranging from -0.2 percent to -0.7 percent over the year.   

As you can imagine, a great deal of real wage growth in recent years can be attributed to very low inflation rates rather than significant increases in nominal wages.  With very low inflation, even a modest raise of three or four percent still provides the recipient with a one to two percent real wage increase.  Even modest raises like that do not appear to be prevalent in today's job marketplace.  As one would suspect, in this environment of "you're damn lucky to have a job", employers are less than motivated to actually increase wages by a significant amount.

If we link all of this data to the overall economy and how consumers are viewing things, it may explain this:

Consumer sentiment, while it is up from its 2008 - 2009 lows, is nowhere near the levels generally seen during inter-recessional periods.  In fact, during the last period of economic growth between 2003 and 2008, consumer sentiment ranged from 90 to 100 for the most part.  That compares to a level that has ranged from 70 to 80 over most of the period of time since the end of the Great Recession.

So much for shared prosperity.  It's no wonder that so many Americans are feeling poorer as the years pass.  The fact that productivity keeps growing while wages remain stagnant makes one wonder how much longer corporations will be able to squeeze more and more blood out of a stone without giving something back.  And, until consumers feel that they have sufficient credit or income to spend, the economy is likely to continue to expand at a rather tepid rate as has been typical since the end of the latest recession.


  1. Society must find a better way to divide labor and give more people a path to finding real and fulfilling work. The cost of inequality is taking a toll on our culture. Robots and new technology have streamlined production increased productivity and eliminated many jobs. Big business is good for big business but not necessarily for the masses. Consolidation often means a gain in efficiency, but this often comes at the cost of losing diversity and a "robustness" to both society and the economy. The benefits of efficiency sometimes have a huge hidden cost, in 1993 the movie Demolition Man "everything is Taco Bell". How the fruits of labor are divided is important, this includes not just the wage deserved by a common laborer, but how much CEO's, those in management, and those that can't, or choose not to work, receive. While we have become far more efficient in producing goods, all people should in their life, in some way contribute to the good of society and the economic pie. The post below gives more thoughts on the this subject,

  2. Just to add to the discussion. I see things from two different worlds. One is as a small business owner. The other from the executive position of a manufacturing company.

    I will start with the latter. Raises over the past couple years have been around 2 percent for ALL. So this notion that the top guy is getting a big boost is not true, or at least not in our organization. It is true that the management team has the chance to get a bonus each year. However, many benefits once not taxes, now are taxed. The steep rise in healthcare costs have primarily been absorbed by the company. So this notion that all big corporations are out to hurt their employers because of the profit goal, is not true as well. Additionally, many jobs that once were human work for a manufacturing laborer have been replaced with machinery. However, nobody wanted to do such boring work. It wasn't just the mental issues, but physically as well. There are many good corporations trying to do the right thing here in the US, but they too are feeling the pinch from competitors in Asia and feeling the pinch of higher taxes and more regulations that is costly for the company.

    As a small business owner, I am feeling downright depressed. Our business is busy, have grown throughout the recession and thereafter, but still every day a hurdle is being placed in front of us. Most people do not realize how this feels since so few Americans are business owners. It is hard to get financing, it is hard to comply with new regulations, and we spend more time trying to dodge bullets and wonder why we bother. Just imagine. We are successful. Imagine the person struggling to have customers.

    I have lots of small business friends and associates. It looks very grim. I don't care what the business is, it is an overall feeling that more taxes are coming, more regulations, and longer hours for less pay. On top of that employees, not walking the walk, do not realize the enormous strain on the owners, and how fragile the economy really is.

    I travel the same road to town every day. Every year another business closes. The churn rate in the US was negative based on the latest data which is about 2011. So at best, the born businesses, and the death businesses are even. No gain. This has been pretty much the picture for some time.

    My plea to governments is to stop punishing us that are desperately trying to earn a wage and keep our employees happy and employed.