In the United States, wages have stagnated and even declined for a long time. This is true for most working citizens, including those who graduated from college. The recently released employment report for August, which has shown disappointing data, including wage growth that doesn’t seem to be accelerating, has only reminded people of this harsh reality.
Flat or declining wage can curb demand and dampen economic growth. Currently, median wages have declined by 3% after adjusting for inflation, while yearly economic growth has reached approximately 2.5 percent. At this rate, growth won’t be able to completely repair the damage from the preceding recession. It appears like income surges to the top of the economic ladder, while declining for everyone else.
In my opinion, officials should focus more on devising ways to increase wages. However, by the looks of it, the opposite is happening. Just as the Congress weakened the economy by switching too soon from stimulus spending to budget slash, the Federal Reserve is considering to start hiking interest rates this 2015. This just goes to show that there is a belief that the US economy is going back to normal, but it would be premature.
The hourly compensation in a healthy economy, which has a flourishing middle class and upward mobility, is in line with labor productivity. For the majority of working people, wage increases have lagged behind productivity in recent decades. Since the early part of the 1970s, the median wage has climbed by only 8.7%, while productivity has risen by around 72%. Since the year 2000, there has been a wider gap, with wage rising by only 1.8% despite productivity growing by 22%.
Why is this happening? The answer is simple: The high productivity growth has boosted corporate profits, shareholder returns, and compensation of executives rather than the wage of the workers.
The central bank of the US has a crucial role in reversing this trend, given the fact that one of the Fed’s mandates is to promote full employment. The stagnation of wages is an obvious sign that the domestic economy is not at full employment. An increase in interest rates by the Fed, which will send the wrong signal regarding the health of the economy, could make it more difficult for labor groups and policy makers to insist on the urgency of their efforts to raise wages.
Acting as if the US economy is already close to reaching full employment and hiking interest rates, will be a huge setback for the efforts of those pushing for pay increases. The economy is not yet near full employment. The evidence is in the paycheck.