For
most Americans, paychecks determine living standards. Unfortunately,
wages in America have long stagnated or declined for most working
people, including college graduates.
The disappointing employment report for August — in which wage growth showed no sign of accelerating — only drove home that reality.
Worse, flat or falling pay is self-reinforcing
because it dampens demand and, by extension, economic growth. In the
current recovery, median wages have fallen by 3 percent, after adjusting
for inflation, while annual economic growth has peaked at around 2.5
percent. At that pace, growth isn’t able to fully repair the damage from
the recession that preceded the recovery. The result is a continuation
of the pre-recession dynamic where income flows to the top of the
economic ladder, while languishing for everyone else.
Policy makers should be focused on strategies to raise wages, but the opposite appears to be happening. Just as Congress enfeebled the economy by switching too soon from stimulus spending to budget cuts, Federal Reserve officials have all but vowed to begin raising interest rates
this year. That move reflects a belief that the economy is returning to
“normal,” but it would be premature, because today’s norm is an economy
that is incapable of generating and sustaining broad prosperity.
In
a healthy economy with upward mobility and a thriving middle class,
hourly compensation (wages plus benefits) rises in line with labor
productivity. But for the vast majority of workers, pay increases have
lagged behind productivity in recent decades. Since the early 1970s,
median pay has risen by only
8.7 percent, after adjusting for inflation, while productivity has
grown by 72 percent. Since 2000, the gap has become even bigger, with
pay up only 1.8 percent, despite productivity growth of 22 percent.
Why
has worker pay withered? The answer, in large part, is that rising
productivity has increasingly boosted corporate profits, executive
compensation and shareholder returns rather than worker pay. Chief
executives, for example, now make about 300 times more than typical
workers, compared with 30 times more in 1980, according to the Economic Policy Institute. Other research shows far greater discrepancies at some companies.
For
younger people, pay has actually declined. The average hourly wage for
recent college graduates in early 2015 was $17.94, compared with $18.41
in 2000. That “loss” in starting pay, about $1,000, can carry over to
diminished earnings for years to come. Young high school graduates have
it even worse. Their average hourly pay was $10.40 in early 2015 versus
$11.01 in 2000.
The
Fed is a crucial player in reversing those trends, since one of its
mandates is to foster full employment. Wage stagnation is a clear sign
that the economy is not at full employment, which means it needs loose
monetary policy, not tightening. An interest rate hike,
by sending the wrong signal of economic health, could make it harder
for labor groups and policy makers to assert the urgency of their
efforts to raise pay.
In the past year, low-wage workers have successfully fought for minimum wage increases in states and cities. Congressional Democrats have championed legislation to raise the federal minimum wage and to fight wage theft and abusive worker scheduling. The Labor Department is moving ahead with a much needed new rule to update the nation’s overtime-pay laws.
In
the midst of those efforts, it would be a setback for the Fed to act as
if the economy is already near full employment. It’s not. The proof is
in the paycheck.
What’s up with the Fed?