Employers in the U.S. are hiring, the nation’s unemployment rate is now at a rate considered near normal, and jobs are being filled across a range of industries, but there’s a missing piece of the puzzle: Paychecks still aren’t getting fatter despite improving labor market fundamentals.
What’s keeping the lid on wage growth? While there are endless theories (many of them debatable), here are four real possibilities:
After a weak gain in the first three months of 2015, the U.S. economy expanded at a seasonally adjusted annual pace of 2.3% in the second quarter—more or less the same pace at which the economy has been growing for the past six years. Contrast that to pre-recession growth, which averaged 3.5%.
“This diminished growth rate suggests that aggregate demand for goods and services still remains fragile, affecting both the willingness of firms to invest in the future and hire workers,” says Victor Calanog, chief economist and senior vice president at Reis. In other words, it’s an employer’s market.
Labor market slack
The official unemployment rate, which reached 10% in 2009, is currently down to 5.3%. That may sound optimistic, but it’s not a revealing indicator of the job market’s strength because it doesn’t reflect the real labor market slack still lingering in the economy, says Irene Tung, senior policy researcher at the National Employment Law Project.
And this slack—defined as more workers than jobs available—is “excessive,” as indicated by the large number of unemployed or underemployed workers, and record low labor participation (62.6%). “It’s well above what you would see in a well-functioning, tight labor market,” says Mark Zandi, chief economist of Moody’s Analytics.
Technological advances and globalization have meant there are fewer middle-wage jobs to be had in the U.S. While some workers are learning new skills or reinventing themselves, and a few are retiring, countless others who had relatively well-paying jobs in dying sectors such as manufacturing are settling for lower-paying jobs within the service sector instead (such as retail, leisure, and hospitality), says Erik Brynjolfsson, director of the Initiative on the Digital Economy at MIT. “The weakness in worker compensation reflect this shift in the type of employment being created; the net effect has been lower wages.”
“Companies are stingy,” says Ozlem Yaylaci, U.S. economist at IHS Global Insight. “They don’t want to pay anyone anything, and if there’s no pressure to, then why would they?” In lieu of monetary compensation, companies are offering “other elements to otherwise complete the work experience,” says Mary Ludgin, director of global investment research at Heitman Capital Management—from flexible work arrangements to snacks.
“Businesses are allowing workers to get small things they want, but they’re not paying for it in terms of cash, and my sense is that you’re seeing this in the high-flying tech sector, financial services, and other areas where you would otherwise expect wage growth to pick up,” says Zandi.