5 reasons your pay isn’t growing faster

This year, Americans are supposed to see an additional $4,000 in their paychecks. That’s what President Donald Trump promised in the fall when pitching his economy-boosting tax cuts. 

But that money is nowhere to be seen in the employment report released Friday by the Labor Department. Average hourly earnings have increased 13 cents between January and April, to $26.84. Multiplied over 12 months, that translates into an additional $230 for the worker in a full-time job.  

Americans wages are growing at a modest 2.6 percent year over year—far below the rate economists say we should be seeing, given unemployment of 3.9 percent. In theory, a tight labor market forces employers to bid up wages as they compete for workers.

Economists can’t agree on what the problem is, but here are the leading theories.

The recovery after the Great Recession has been unusual in the large number of low-wage jobs it created. Since 2012, three times as many jobs were created in the relatively low-paying leisure and hospitality sector than were created in manufacturing. Their sheer numbers drive down average wage growth.

And low-paying jobs exist even within the companies that are held up as the success stories of the modern economy. “For many technology companies, there’s a bifurcated workforce. You have your drivers and your software engineers; your factory workers and product managers,” said Jukay Hsu, CEO of the nonprofit C4Q, which teaches low-income people to code. 

Amazon—one of the U.S.’ most valuable companies—has a median income of just $28,000, according to recent SEC filings.

  • “Low unemployment” really isn’t

Even though the official unemployment rate is below 4 percent, it discounts a large pool of people who are still out of the labor force and could re-enter it under the right conditions. The share of the working-age population that is neither in a job nor searching is the highest it’s been since the mid-1980s.

Some businesses have loosened requirements for workers, dropping drug test demands or looking at candidates who have spent time in prison. But because there’s still a large pool of people who are available to work—despite not being counted as unemployed—businesses don’t have to bid up wages that much, economists say.

“Instead of bidding up the wages for those people who are classically ‘good’ candidates, employers are looking at other types of candidates, who may not have gotten a lot of consideration at other times, knowing they won’t have to make the same wage offer,” Cathy Barrera, chief economist at ZipRecruiter, told CBS MoneyWatch.

Another school of thought holds that businesses are spending more to hire workers—it’s just not in the form of wages.

“There’s a pretty well-documented shift toward benefits like meals at work, more expensive health care plans and paid time off,” said Andrew Chamberlain, chief economist at Glassdoor.

Over the last five years, health care costs have grown by 5 percent annually—more than twice as fast as wages have. The average employer today spends $15,000 a year to cover a worker.

In Silicon Valley, famous for its free gourmet meals, the yearly cost of just that well-known perk has been estimated at $10,000 per worker. (The value it creates, by having workers stay on campus instead of leaving the office to eat, may well be worth more to the employer.)

Overall, the share of compensation that comes in the form of salary has been dropping since the late ’90s, according to Labor Department figures. 

  • Workers aren’t productive enough

In the long term, increases in productivity are what drive wage increases. And lately, productivity growth has been anemic.

“T]he more productive workers are, the more they can be paid,” Joseph LaVorgna, chief economist for the Americas at investment bank Natixis, wrote in a research note. “Weak productivity growth in the current business cycle largely explains the lack of improvement in worker pay.”

But other economists say that’s not the whole story, and that the historic link between productivity and wages was severed in the 1970s by forces such as technological change and globalization. Since then, productivity has grown nearly six times the rate of pay, notes the left-leaning Economic Policy Institute. The EPI points to the erosion of worker protections and weakening of union power as major culprits.

As to why the corporate tax cuts haven’t had an impact on hourly wages, some say: It’s just too soon. At the end of last year, when the tax changes became law, many businesses would have already locked down spending plans for three to six months ahead, said Chamberlain. 

“Companies often do quarterly planning way in advance,” he said.”It’s my belief we’ll start seeing impact this quarter, and the sectors where you’ll start seeing big gains are capital intensive sectors: construction, aviation, manufacturing.”

He added, “we aren’t losing manufacturing jobs, which is a good sign.” 

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