Recession Puts Damper On Workers’ Wages

We’ve been reading a lot about people who’ve lost their jobs and are still desperately looking for work. What we haven’t read much about are the impacts of the recession on people who weren’t laid off or those who were but found new jobs.

A new brief by the Economic Policy Institute focuses on them. It shows that, in the last two years, they’ve suffered a “broad-based collapse of wage growth.” It’s part of longer-term trends that have left workers with a shrinking share of the benefits of both productivity and total income growth in our nominally egalitarian society.

First, the recession impacts. In 2007, private-sector wages increased by an average of 3.6%. In 2008 and again in 2009, the average increase was just 1.6%. The 2009 growth was actually less than the inflation rate. In other words, paychecks may have been a little bit bigger, but workers actually lost purchasing power.

We see the recent “wage deceleration” in all major occupational groups except those related to sales, where some percent of pay reflects “outputs” like how much employees sell. It’s been greatest for relatively low-paid jobs, i.e., service occupations and office and administrative support. But management and professional occupations have also been affected.

EPI says we can expect such sluggish wage growth until the unemployment rate drops to pre-recession levels. That probably won’t happen until 2015, if then. But full recovery won’t be the end of the story — unless something else changes dramatically.

Economists generally assume that faster productivity growth raises living standards, as workers get a share in higher compensation. But throughout the last business cycle, i.e., from the recession in 2000 to the onset of the recession we’re in now, productivity increased far more than compensation.

The pay-productivity gap widened as the boom took off. Between 2002 and 2007, productivity increased by 11%. The average hourly compensation for both high school and college graduates actually fell — more for the former than the latter.

Adjusted for inflation, the median income for working families dropped by more than $2,000. EPI says this is the only business cycle on record where the typical working family wound up with less at the beginning than at the end.

At the same time, the income gap between the wealthiest households and the rest of us grew exponentially. The Center on Budget and Policy Priorities reports that, between 2002 and 2007, the average inflation-adjusted income gains for the top 1% of households rose nearly 62%. The bottom 90% of households gained, on average, 4%.

This represents the continuation of a longer-term trend — one that EPI says laid the foundation for the current recession. If I understand correctly, it’s referring to the collapse of debt-fueled consumption by consumers whose incomes couldn’t keep pace with their felt needs.

In the future, it says, “we need consumption growth to be driven by strong employment growth and higher real [inflation-adjusted] wages for most workers.”

How, I wonder, will we get there when we can’t get consensus on even some modest job-creating investments — let alone any legislation that would channel a greater share of business profits into wages.


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