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Economics

Wage Stagnation Is One Disease With Many Causes

First it was low productivity. Then it was health insurance. Then it was China. Then it was….

Wage Stagnation Is One Disease With Many Causes

First it was low productivity. Then it was health insurance. Then it was China. Then it was….

No one’s been waiting for a raise longer than these guys.

No one’s been waiting for a raise longer than these guys.

Photographer: Mark Wilson/Getty Images North America
No one’s been waiting for a raise longer than these guys.
Photographer: Mark Wilson/Getty Images North America

One of the most vexing and puzzling problems in the U.S. economy is wage stagnation. There are many proposed culprits -- globalization and foreign competition, the decline of unions, automation, outsourcing and industrial concentration. Plenty of high-quality research is being done to disentangle these causes. But stepping back and looking at the history of wages in the U.S. over the past half-century provides a few clues -- as well as raising some intriguing mysteries.

Since 1964, when data first became available, average hourly earnings for production and nonsupervisory workers have increased more or less steadily, from $2.50 an hour then to about $23.00 today:

Looks Aren't Everything

Average hourly earnings of production and nonsupervisory employees

Source: Federal Reserve Bank of St. Louis

But this doesn’t account for inflation, which raises the prices of consumer goods and thus reduces the real value of the wages workers receive. There are two main measures of consumer price inflation -- the consumer price index and the personal consumption expenditure index. Adjusting wages for these two measures yields a very different picture:

Different Measures, Similar Results

Source: Federal Reserve Bank of St. Louis

Index 1964 = 100

PCE inflation is generally lower than CPI inflation, due to different data sources and different methods of weighting the importance of things like rent and health care. So if PCE is used, real wages will look higher than with CPI. But both measures show the same thing -- a drop in real wages from about 1973 through 1994, followed by a bumpy rise from then on.

The fact that wages have risen since the mid-1990s challenges some of the most prominent narratives about wage stagnation. The so-called China shock, as well as the rise of offshoring more generally, happened in the 2000s. Manufacturing employment fell off a cliff in that decade. Private-sector unionization was falling throughout the period. Automation and computerization have only accelerated. The market power of dominant companies has increased. Yet none of these halted the trend of rising real wages.

Now, that doesn’t prove that these factors aren’t important. If unionization had been higher, automation slower, or global competition less intense, wages might have risen even more than they did during the past 24 years. But wages rose nonetheless, and the stark contrast with the decline in the two decades before 1994 suggests that other important factors are at work.

One of those factors is health care. The wage graphs above don’t include benefits like health insurance. From the 1960s through the turn of the century, total compensation grew much faster than wages 1 :

Pay Hasn't Kept Pace

Source: Federal Reserve Bank of St. Louis

Index: 100 = 1964

A big factor in this divergence is probably the rise in health-care prices, which has translated into rises in insurance premiums:

Getting Sick Is Going to Cost You

Inflation in cost of medical care relative to total inflation*

Source: Federal Reserve Bank of St. Louis

* Index 1982-84 = 100

This factor looks like it was especially important during the 1980s.

A second factor was productivity, which slowed between the early 1970s and the mid-1990s, exactly when wage growth slowed as well. But this can’t explain all of the wage stagnation, since total compensation has lagged productivity since that time:

Benefits Make Up a Bigger Part of Compensation

Source: Federal Reserve Bank of St. Louis

Index 1964 = 100, adjusted for PCE inflation

 

A third factor, not discussed very often, might have been inflation. In most economic models, workers know how fast prices are rising and understand how this erodes their paychecks, and bargain with their employers accordingly. In real life, however, many workers may simply not pay attention to inflation or understand how to negotiate for cost-of-living adjustments. Thus, the higher inflation of the 1970s and early 1980s might have allowed employers to effectively cut workers’ pay.

A final possibility is that wage stagnation might have simply been a combination of a whole bunch of things, with workers taking hits from different directions in different decades. Inflation in the 1970s; slow productivity growth in the 1970s, 1980s and early 1990s; rapidly rising health-care costs layered on top in the 1980s and 1990s; Chinese competition and pressure for automation in the 2000s. And all throughout the period, there was the steady pressure of de-unionization and a shift away from manufacturing.

In other words, the history of U.S. wage stagnation might have been, as the adage goes, just one damn thing after another. But that also means that when the deluge eventually ends, wage stagnation might end with it. Since about 2010, wages have largely kept pace with productivity:

No Longer Getting Left Behind

Output per hour relative to average hourly earnings*

Source: Federal Reserve Bank of St. Louis

* Index 100 = 2010

This doesn’t mean the U.S. doesn’t need policies to boost wages. Workers lost a lot of ground between 1973 and 1994, and didn’t make up enough of it between 1994 and 2009. Stronger worker representation within companies, as well as government health care, would help restore some of those losses.

In the meantime, slow productivity growth may be the last thing that's holding back wage growth. Even as they try to make up for past rises in inequality, policy makers shouldn’t forget the importance of technology and economic efficiency. But regardless of what policy does, workers may finally be getting more of the raises they’ve been missing out on for more than a generation.

  1. Average hourly earnings are only for production and nonsupervisory workers, while hourly compensation is for all workers. But average hourly earnings for production and nonsupervisory workers tends to closely track average hourly compensation for all workers in the recent time periods where the latter is available.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net