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Erosion Of Wages Hinders Economic Recovery

Lawrence Mishel and Jamey Bell

September 15, 2009

In past struggles to turn recessions into recoveries, the U.S. economy has generally had a not-so-secret weapon: the American consumer. That was then. Now, however, the usual rules don't seem to apply. Tighter credit, the erosion of housing-based nest eggs, record levels of personal debt and the prospect of prolonged double-digit unemployment, taken together, are giving consumption a bad name — and converting yesterday's legendary American shoppers into today's savers.

It could be a passing fad — a kind of earth shoes for the family budget — except for one thing: Wage growth for American workers across the income and education spectrum has collapsed since January. And that spells very bad news for a speedy recovery.

For all workers, private and public, nominal wages (that is, wages before inflation is taken into account) grew only about half as fast over the past year as they had over the previous two years. This collapse in wage growth, together with new workplace developments, such as the rise of unpaid furloughs and the elimination by many employers of 401(k) contributions, are expected to put more pressure on workers already treading water. Unless wage growth can regain its historical forward momentum, consumers who are focused on paying debt and rebuilding savings simply won't have enough income to stimulate the economy with spending. This means that the path to recovery for the U.S. economy is likely to be much longer and slower than in past recession-recovery cycles.

In the private sector, nominal wage growth plummeted to 1.3 percent in the first half of 2009, one-third slower than in late 2008 and 40 percent behind the growth rate in 2007 and the first half of 2008. Wage growth slowed even more for managerial and professional workers — to 1.1 percent, down by half since the end of last year and one-third below 2007 and the first half of 2008. All told, for the 80 percent of workers who hold production and nonsupervisory jobs, wages posted an annualized growth rate of 4 percent through 2007-08, but collapsed to 1.4 percent growth this year.

These trends are borne out in recent consumer surveys, in which a majority of respondents reported worsening personal finances, and the lowest percentage in the survey's 60-year history reported any income gain at all.

The picture is especially grim for women. While increases in unemployment have been much steeper for men in this recession, the sharpest wage deceleration is being experienced by women, whose wage growth this year dropped by 57 percent over previous years. Much of this decline is attributable to the collapse of wage growth among college-educated women to just 0.3 percent — far below even the recent relatively modest inflation rate — during the last year. This dramatic drop also accounts for much of the overall 56 percent decline in wage growth among all college graduates.

In Connecticut, where unemployment has reached its highest point since 1977, a decline in wages among low-wage workers continues a long-standing and economically damaging trend. Between 2001 and 2008, real hourly wages for the bottom fifth of wage-earners declined by 7.5 percent, and the current recession will likely erode their wages further. Economic inequality has also been increasing in Connecticut over this period, with a growing wage gap between the top and bottom 10 percent of wage earners. Connecticut is second in the nation in income inequality, according to the U.S. Census.

The extraordinary challenges at hand make continuing government action aimed at generating jobs a necessity. We need tax credits to subsidize the creation of new jobs, continuing fiscal relief to states — both to ward off damaging job cuts and assist private firms that do business with the states — and increased supports to hard-hit families. We need an ongoing commitment from government to address the ever-widening gap between workers' rising productivity and their stagnating wages, a long-term labor market problem which has been exacerbated by current trends.

Right now, everything depends on the government. Consumers can't buy a way out of this hole and businesses can't hire a way out without customers. That makes government the only credible player that can make the investments on the scale that's needed to get jobs, wages, and the economy growing again.