For years, I have been arguing that mainstream economists, who continue to pat themselves on the back for a job well done, have no understanding of why the growth of workers’ wages has been so slow after the Great Recession.
Their presumption has long been that, as the level of unemployment fell, workers’ wages would rise. But, as we have seen, the official rate of unemployment has declined dramatically (from a high of 10 percent in October 2009 to to 4.9 percent currently) but wages are growing very slowly (at an annual rate of 2.5 percent in July), as they have throughout the period of recovery (averaging about 2.1 annually).
My answer, as I have explained many times, is that what mainstream economists leave out of their theory and their models is the role of the Reserve Army of the Unemployed and Underemployed. The fact is, when employers can hire and fire workers at will (and when, in addition, they can use the value workers produce to invest in new labor-saving technologies, outsource jobs to the most profitable locations, undermine workers’ attempts to form unions, and much else), they create a group of workers who are either unemployed (whether or not they are actually looking for jobs) or underemployed (often working at part-time jobs when they’d rather have full-time jobs). The existence of such a Reserve Army regulates the level of wages—and thus far, during the current recovery, it has served to keep both wage growth and the wage share of national income at very low levels.
Now however, more than seven years into the current recovery, the problem of slow wage growth and a low wage share is so severe and persistent that the Federal Reserve Bank of Richmond has taken notice.
The persistence of slow wage growth since the Great Recession — amid a steady economic recovery and a sharp drop in unemployment — has become one of the biggest puzzles for economists in recent years. It’s not just an issue for economists; in this election cycle, weak wage growth has been used to support proposals ranging from strengthening unions to boosting the federal minimum wage. More broadly, stagnating incomes have likely fed into the broader ongoing economic pessimism among Americans. One recent Pew Research survey, for example, found that 73 percent of those polled described economic conditions as fair or poor, while only 27 percent considered them excellent or good.
What’s interesting about their analysis is that, however unconsciously and using very different methods, they’ve actually stumbled on at least one aspect of the Reserve Army: the difference in wages between, on one hand, workers who remained employed and, on the other hand, those who were initially let go and are now (at least in some cases) being rehired.
What actually happened during the Great Recession? It turns out that workers who stayed on at their jobs were indeed among the higher skilled and better paid, whereas those who were let go were lower skilled and tended to have wages below the median. The growing concentration of higher-paid workers meant the aggregate wage stayed surprisingly high even as gross domestic product plunged and unemployment spiked. Then, as the economy picked up, the wages of the continuously employed rose as well, just as economic theory would predict. At the same time, however, the new hires coming back into the full-time workforce — whether they had been unemployed, forced to work part-time, or had dropped out of the labor force altogether — re-entered at substantially lower wages compared to their continuously employed peers.
About 80 percent of these “re-entries” started their new jobs below the median wage.
In other words, even as the economy was improving and unemployment was falling, the effect of so-called re-entries—hiring from the Reserve Army—was to dampen the increase in their own wages (and, I would add, to lower the wage demands of those who managed to keep their jobs). In general, no matter what the last wage was of those workers who had lost full-time work, they re-entered the workforce at significantly lower wages—thus dragging down the overall growth in wages (because their own wages were low and because workers who remained on the job were forced to constrain their own wage demands, as lower-wage replacements were hired or on the job ladder below them).
And the prospect looking forward?
even if there is a smaller amount of slack left, it means that people returning to full-time work may face a lower starting wage because there is still relatively more labor supply than labor demand, compared to the pre-recession economy. Also, workers coming back to full-time employment may well be earning discounted wages that are lagging trend productivity growth — and that may not change rapidly even as the labor market improves.
And that’s exactly how capitalism and its Reserve Army work—contrary to the view of mainstream economists and the other champions of the current recovery.
So, to answer the question, will workers finally get a raise? Not, within existing economic institutions, anytime soon.
A recently released report from the Joint Economic Committee of the U.S. Congress (pdf) illustrates the current anemic wage picture, finding that average U.S. wages inched up just 1.9 percent over the last year. In nine states and the District of Columbia, inflation-adjusted wages actually fell during the past year. Average hourly earnings for private-sector workers declined 1.8 percent in Alaska, 1.3 percent in Colorado and 0.1 percent in the District of Columbia. In Kentucky, they’re taking home 0.6 percent less, while in Michigan, earnings are down by 0.7 percent. Pay in Nevada declined 1 percent, Texas earnings slid 0.3 percent and Vermont saw a drop of 1.3 percent. Earnings fell 0.1 percent in West Virginia and 0.4 percent in Wyoming.