Sensible Reasons Why Middle Class Wages Have Not Increased in the Last 10 Years

Wasson and ThornhillNews

Wages have not been rising because of high unemployment, increasing employer health care costs, and the shift to lower paying jobs.

 

Productivity and Workers’ Pay

Our last blog post introduced the reality that for the last several decades, and especially in the last 10 years or so, U.S. worker productivity has significantly increased but that has not translated into higher wages. During this last decade the wages of most Americans have been stagnant.

Why is that? In our last blog post we looked at a number of different ways that globalization is keeping down U.S. wages. Today we touch on the role of high unemployment, increasing employer health care costs, and the economy’s shift to lower paying jobs.

High Unemployment

It’s no surprise that high unemployment puts downward pressure on wages. With a larger pool of the unemployed, employers don’t need to increase wages to attract qualified applicants. Those already employed are more willing to stay at their jobs without pay increases. Those seeking work are more inclined to accept work with lower wages to escape unemployment.

But high unemployment doesn’t just hamper overall wage growth, it worsens wage inequality. That’s because lower- and middle income workers, as well as racial minorities are more likely to become unemployed, or underemployed. So their wages are more likely to not grow or to grow more slowly.

How much hourly wages rise or fall for different workers based on changes in the unemployment rate has been historically observed over the decades. During the high-unemployment period from 2006-2011, the estimated cumulative impact of unemployment on the wage levels of different populations of workers were as follows:

  • For low-wage workers (at the 10th percentile of wage distribution): down 29.4% for men and 21.5% for women.
  • For mid-wage workers (at the 50th percentile of wage distribution): down 13.0% for men and 13.6% for women.
  • For high-wage workers (at the 90th percentile of wage distribution): down 7% for men and 11.9% for women.

(NOTE: The above data, and many of the ideas of this blog series, are from The State of Working America, 12th Edition, from the Economic Policy Institute. This nonpartisan, nonprofit organization “was created in 1986 to include the needs of low- and middle-income workers in economic policy discussions. EPI believes every working person deserves a good job with fair pay, affordable health care, and retirement security.  To achieve this goal, EPI conducts research and analysis on the economic status of working America.”)

Increasing Employer Health Care Costs

If businesses have to pay more for their employees’ health care insurance, the businesses have less money available for wages and salaries. Even if employees are being more productive to the benefit of the businesses, so that there’s more money available to budget for all employee costs, that money goes towards the increasing health insurance premiums instead of wages.

But have businesses indeed been paying more for the rising health insurance premiums lately (instead of passing those increases on to their employees)? 

There certainly has been a significant increase in employer health insurance costs over a long period of time. Way back in 1948, U.S. employers’ health insurance costs amounted to only 0.5% (half of 1 percent) of what they paid in wages. By 1979, thirty-one years later, that had climbed to 4.5%. By 2010, another thirty-one years later, it had virtually doubled to 8.9%.

But how about the last decade, specifically from 2000 to 2010? Businesses’ health care costs as a share of wages has gone from 7.2% to 8.9% during this period, or an average annual percentage point change of about 0.17% per year. That’s only about 1/6th of one percent. With employee health insurance costs as a share of wages increasing by that relatively small annual percentage over this recent period, this has been quite a very small factor in wage stagnation. Over time the many-decades-long gradual increase in employer health insurance costs does erode wages, but it just doesn’t go very far in explaining what’s been happening to wages lately.

The Shift to Lower Paying Jobs

The economy is undergoing a shift in the mix of industries and the occupations within those industries. This matters because workers with similar skills are paid more in some industries than in others.

Our economy is shifting from goods-producing to services-producing. Overall, the industries that are shrinking pay more than the industries that are expanding. The result is a gradual erosion of wages. For many people this is not so gradual, as throughout the Great Recession and its aftermath countless Americans lost relatively high-paying jobs and after struggling to find work could only find lower-paying service jobs.

This reduction in compensation is worse in the U.S. than in many other countries because the gap between manufacturing wages and service-sector wages is greater here. Also, in many other highly developed countries key benefits like health care, retirement contributions, and vacations are either mandated by law to all employers or are provided on a national basis, much more so than in the U.S. Here in contrast the extent of those benefits varies widely among industries. So the economy’s shrinkage in some industries and expansion in others has a much greater practical effect.

Next…

Besides globalization, high unemployment, increasing employer health care costs, and the shift to lower paying jobs (covered here and in the last blog post), U.S. wages have been kept down by other major factors including the decline of union jobs, a declining minimum wage, and increased executive and finance sector pay. We’ll write about these in our next blog posts in the next several days.