Sep 05, 2018

Why Aren’t American Wages Growing?

Unemployment is lower than it’s been for 18 years. Additionally, the economic expansion that followed the most recent recession is about a year away from being the longest expansion on record. These are staggeringly good economic indicators. The one indicator that tells a bit of a different story, however, is actual wage growth.

Hourly wages have been growing at a measly 2.7% and aren’t showing a lot of promise for rapid growth. This is contrary to a number of economic models that predict that wages should rise when supply of workers falls. It’s simple supply and demand principles.

Interestingly, worker productivity has exponentially increased since 1973. According to one study, productivity has risen almost 74% with real hourly pay rising only 13%. So then where’s the compensation?

Economists say that wage growth rates should be around 3.5%. Dean Baker, co-director of the Center for Economic and Policy Research says, “if wages are stagnating, that means that we’re doing all these great technological innovations, but most people really don’t see the benefit of that.”

Russ Roberts, a researcher at Stanford University’s Hoover Institution, says that when inflation is adjusted for modest pay increases go further because inflation has been so low. If compensation rises faster than inflation, then the worker’s paycheck is getting more powerful.

“I think we should be careful in assuming something’s broken, because a tight labor market isn’t leading to greater wage increases,” he says. “I would simply say that the wage increases we observe are probably understating the actual gains to workers in terms of their standard of living.”

While paychecks may not necessarily be getting fatter, some economists believe that workers are instead demanding better benefits in lieu of more pay. In fact, Employers say they’re spending more on benefits and rewards outside of pay, offering services like on-site health care, telework, and more paid vacation.

Still, the average American worker is still only earning around $44,500 a year—not much more than what a typical worker earned 40 years ago when you adjust for inflation.

But, of course, if workers are demanding benefits instead of pay, it makes sense that wages have been slow to increase. While this may account, in part, for the lack of increases, it’s not in any way conclusive. There are still a lot of unknowns for the American laborer. It’s a story known all too well.

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About the author

Andrew Mosteller
Andrew Mosteller is a freelance writer and regular contributor to Lendio News. His upbringing in an entrepreneurial family nurtured a passion for small business at a young age. Andrew's father, an equity fund manager, taught him the ins and outs of investment financing. Now, Andrew spends his time writing copy for business owners, helping them expand and advertise their unique brands. He's also studying Strategic Communications at the University of Utah. When Andrew's fingers aren't glued to the keyboard, he spends his time reading, podcasting, composing music, and bombing down the ski slopes.

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