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Wage stagnation has been a central element since the Great Recession, for four reasons, none of which is especially encouraging.
First, while overall wages have been stagnant, incomes for higher-wage workers have grown in many occupations. Wages for lower-income workers have not.
This is consistent with evidence from the past several decades, which suggests that labor markets are polarizing.
Highly skilled workers are in increasing demand, while lower-skilled workers are not. This is largely due to technology changes that favor highly skilled workers.
Second, we have seen low interest rates that have no real precedent in modern times.
Many folks are unaware that interest rates are the price of capital investment. With more than seven years of low rates, the price of capital investment has never been lower. This has created a huge incentive for businesses to buy labor-saving equipment and technology.
Evidence of this is the astonishing growth of investment in technology firms that supply labor-saving devices. This keeps demand for workers low and dampens wage growth.
Third, hiring has become more costly across many business types. Here, the Affordable Care Act is a clear culprit, making business expansions or increasing worker hours far more costly. There is even an incentive to let employment slip beneath 50 workers per firm to avoid some ACA provisions. This depresses wages in the short run, though the long-run effect is less clear.
Finally, and perhaps most important, in times of declining revenue, businesses facing a choice of reducing wages or employees almost always reduce employees. Labor contracts, minimum wages and tradition all lead to this result, even though it might hurt all parties concerned.
So, the deep drop in demand for goods and services that accompanied the recession might still depress wage growth. We remain in a period when wages on average are higher than they should be, so wage growth will remain flat.
All of this offers insight into decisions by the Federal Reserve in coming months. With the unemployment rate dropping, there should be upward pressure on wages, but with inflation low, it still might take time to see wage growth.
As a result, the Fed will be less worried about a small bout of inflation. This is because inflation acts silently to reduce wages. While the Fed will never publicly say it is allowing inflation to cut wages, the fact that it is delaying interest rate increases suggests that is exactly what is on its mind.•
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Hicks is the George and Frances Ball distinguished professor of economics and director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.
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