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9 Causes of Wage Stagnation

In the United States, unemployment numbers have remained relatively low in the years following the economic recession – in fact, the lowest they have been since the 1960s, Chase Commercial Banking economist Jim Glassman says. But wages seem to have remained equally low, even as more people are employed, a phenomenon that hasn’t historically occurred during times of economic expansion.

Wage gains from January 2008 to January 2009 totaled 3.6%, but from June 2016 to June 2017, they only achieved a 2.5% bump, according to a Bureau of Labor Statistics report.

At face value, this seems like a puzzling trend; however, nine main causes of wage stagnation explain why demand for employees is escalating without a similar spike in wages.

Labor’s Share of the Income Has Decreased

While for decades labor saw a fixed share of income, advances in technology and changes in the overall market have taken a chunk out of the income allotted to labor, dipping from nearly 65% in the mid-1970s to lower than 57% in 2017, according to the Harvard Business Review.

Wage Inequality is Rising

As the total share of income started to shift, the distribution among labor has also segregated, distributing disproportionately to workers at the top, and declining or stagnating wages for those on the bottom. Looking at only the educated labor force tells a different story: the Harvard Business Review reported workers with a four-year degree did see a boost, from 134% to 168% of high school graduates’ earnings. However, laborers with a four-year college degree or higher are only about 1 in 3 adults (33%), according to a recent Census report on education.

Globalization

In an international market, organizations have access to countries with abundant low-skill labor, which pressures wages downward because of an increased supply. In other words, to remain competitive when many low skills jobs are outsourced, wages drop. Glassman states that while in the past businesses could pass rising costs to consumers, globalization has also expanded consumer options (and increased the number of competitors in a market), leaving the consumer much less likely to foot the bill for higher wages.

Technological Innovation

While globalization may contribute to some loss of low skill jobs,  technology is also a critical factor as well, as innovation has replaced many low-skilled workers with machines.

Young Workers Entering the Labor Force

Retiring Baby Boomers are now being replaced by new, young workers, who often are paid less because they have less experience. Meanwhile, Baby Boomers aging out of the workforce tend to leave during their peak earning years, which means their younger, less experienced replacements are pulling down national averages, Glassdoor chief economist Andrew Chamberlain told NPR.

Declining Unionization

Less union participation can mean less bargaining power for workers. Fortune highlights a clear correlation between the drop in collective bargaining through unions with the beginnings of the wage and productivity gap in the 1980s. According to the Hamilton Project, an estimated 28% of workers belonged to a union in 1956, compared to scarcely more than 10% in 2016. And for workers in the private sector, that number is even lower: just 5% of private sector employees are union members. Collective bargaining is thought to most benefit the low and middle-wage earners, also contributing to lower overall numbers as wage or other standards set by unions often apply for non-unionized workers as well.

Stagnating Full-Time Employment of the Primary Age Group

Increasingly, people between the ages of 25 and 54, who are considered “prime-age” workers, are not in the labor pool. An estimated 22% is thought to be sitting out of the workforce, according to NPR. What keeps these people out of the job market? Sometimes these are stay-at-home parents or those who have sustained an injury that prevents them from returning to work. High childcare costs, taxes, and benefits costs may also make a full-time job less attractive when wages are low, as the benefits of working full-time may not be compelling enough for a return to the job market.

Benefits are Expanding

Looking only at take-home pay doesn’t present a full picture of wage stagnation, particularly as benefits have expanded to include workers’ compensation, unemployment, expanded health insurance, and retirement supplemental plans. This pushes some of the gains into nonwage, as opposed to wage, increases.

Productivity and Wages are Disconnected

Leading up to the 1980s, real wages and productivity increased in tandem, primarily driven by collective bargaining negotiations, according to MIT professor Thomas Kochan. Then, the growth split, rising by an estimated 8% for wages, but 63% for productivity. One key challenge, Kochan says, is to educate employees on technology – throughout their career – to help close that gap as technology takes an increasingly predominant role in productivity.

A warming economy and increasing labor-enhancing technology may bode well for wages in the next few years; however, it’s likely that the boost will come largely for workers with relevant skills to capitalize on technology and contribute in a new market.

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