5 Reasons U.S. Wages Aren't Rising

"Median wages of production workers, who comprise 80% of the workforce, haven't risen in 30 years, adjusted for inflation." -- Robert Reich 

This quote from Robert Reich, former Secretary of Labor in the Clinton administration, succinctly and accurately describes the disparate and desperate nature of wages within the U.S. for the vast majority of Americans.

For the richest Americans, wage growth and wealth creation haven't been difficult. CEO pay has been growing at an astronomical rate in comparison to the bottom half of American wage earners and, according to a report released by the Economic Policy Institute in May, CEOs are paid an average of 231 times more than the average worker and their compensation increased by 725% between 1978 and 2011. Furthermore, the average annual earnings of the top 1% grew by 156% between 1979 and 2007, and by 362% for the top 0.1% in the same time period!

As I discussed recently, wages for the average worker haven't gone anywhere. Although nominal wages have risen by 201.5% since 1980, inflation-adjusted (real) wages have only ticked higher by a meager 1.39%! I wish I could say that there were one or two easily identifiable reasons why U.S. wage growth has been stagnant for such an extended period of time, but it actually appears to be a combination of five different factors.

1. Employers have little to no incentive to offer raises
This may seem a bit short-sighted, and it might appear to be applicable only in situations where unemployment levels are high, such as what we've experienced over the past four years, but employers have little incentive to offer employees a raise if they have the perceived upper hand. With unemployment levels tracing near 8% and millions of workers waiting in the wings for work, it'd be fair to assume that there are a good amount of desperate job seekers out there willing to work for almost any wage.

To make matters worse, the majority of jobs created since the recession ended have come from low-paying service industries like food service or retail. So while we've begun to see a slight drop in unemployment rates as we head into the crucial holiday shopping season, which might give workers the illusion that the job market is picking up, it merely reinforces the notion that low-paying jobs are driving productivity growth, and wage hikes are a distant afterthought to employers.

2. Health care costs are rising too quickly
Perhaps one of the most prominent reasons U.S. wage growth is so anemic has to do with the large chunk of your paycheck (i.e., your employers' profits) that goes into paying for health care coverage.


Source: Bureau of Economic Analysis.

Although wage growth has been pitiful at best, the inflation-adjusted health care benefits paid to the average U.S. worker rose by a not-too-shabby 10.8% from 2007 through 2011 according to an analysis conducted by USA TODAY last month. But, as you can also see from the above chart, health care benefits are accounting for nearly 20% of total workers' compensation, and that's up from less than 10% in the 1960s.

Don't get me wrong, rising health care benefits are a good thing, but the exorbitant percentage of workers' compensation going into supporting that coverage helps explain why employers aren't willingly dishing out pay raises.

3. Blame college
A college degree in today's society is akin to graduating from high school a couple of decades ago -- it's practically a prerequisite for landing a decent job. A college degree has been proven to earn a worker more money over his or her lifetime, and college graduates have a much lower unemployment rate than non-college graduates. Also, based on a study published in the Washington Post in July, median earnings for male college workers fell by roughly 10% between 1969 and 2009, while those male workers with less than a high school education saw their median earnings fall by a staggering 66%! 

Yet, in spite of these positives, college offers two major drawbacks to wage growth. First, students are delaying their entry into the workforce by staying in school longer than ever and racking up untold amounts of debt. These loans can often be large enough to coerce a student to take a low-paying job outside of their field of study simply to meet their debt obligations. Secondly, the rapid expansion of online schools and even large state-run universities has created a lot of competition among graduates from similar fields. Degrees are becoming less differentiated, which is making it harder for employers to reward people with specialized degrees. 

4. The U.S. government isn't moving swiftly enough with the federal minimum wage
It might appear a joke that members of Congress receive an automatic pay raise each year, yet the federal minimum wage hasn't risen from $7.25 per hour in over three years, but it's the cruel and grim reality.

Congress has an awful history of protecting low-wage workers by keeping federal minimum wages in line with inflation. Nancy Woo, the director of domestic policy at the Center for Economic Policy and Research, noted in July that if the minimum wage had simply kept up with inflation since 1968 it would be above $10.50 per hour. What's more, based on Woo's calculations, the average minimum-wage worker needed to work an additional 1,750 hours in 2011 just to pay for the same health care costs as compared to 1979. 

The truly mystifying fact is that large corporations, not small businesses, actually employ the majority (two-thirds) of all low-wage workers. Of those, the three largest, Wal-Mart (NYSE: WMT  ) , Yum! Brands (NYSE: YUM  ) , and McDonald's (NYSE: MCD  ) , are all significantly more profitable than they were prior to the recession, yet are all increasingly resistant to giving low-wage employees a raise according to the National Employment Law Project. 

5. Blame outsourcing
Lastly, when in doubt, blame weak U.S. wage growth on the continued outsourcing of U.S. productivity overseas.

According to research firm Statistic Brain, which recently studied outsourcing figures for 2011, nearly 2.3 million U.S. jobs were outsourced last year. More than 50% of manufacturing companies surveyed admitted to outsourcing jobs overseas, while the information technology sector came in over 40%. Unsurprisingly, the No. 1 most common answer given as to why U.S. jobs were outsourced was to "reduce or control costs."

Eventually, pricing and labor pressures in China and India, two of the most common countries for outsourced U.S. jobs, will push wages up in those countries to unfavorable levels, but at that point, there will likely be another set of countries willing to take their place.

There are potential solutions to these problems that include raising the federal minimum wage, focusing on low-wage job growth in America's largest corporations, enacting health-reforms that reduce or slowdown the rapid progression of health care costs, and keeping U.S. jobs in America. But, when all is said and done, not enough is being done to help out the average American worker.

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Read/Post Comments (20) | Recommend This Article (24)

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  • Report this Comment On November 06, 2012, at 4:24 PM, davaidesign wrote:

    What about stuff costing less money to buy? Wages may be stagnant in absolute terms adjusting for inflation, but the same paycheck can buy a lot more stuff today than it did in the past. I'm pretty sure the % of total spending that is discretionary has gone up over time.

  • Report this Comment On November 06, 2012, at 4:43 PM, TMFUltraLong wrote:

    davaidesign,

    I'm pretty sure you're correct that discretionary spending is up (I'll need to look into that, just sort of going off the top of my head), but I know that spending on health-care and fuel costs as a percentage of compensation has gone through the roof and is far outpacing any wage growth the average worker has been privy to.

    TMFUltraLong

  • Report this Comment On November 06, 2012, at 4:45 PM, Darwood11 wrote:

    In 1978 I left the ranks of the "employed" and started my first business. It was a difficult time, and there were several recessions.

    It was the most difficult decision I had made to that point, and it was also the best!

    One way to increase your wages, or earnings, is to put yourself at risk. I don't mean purchasing stocks, i mean putting yourself in the driver's seat.

    There is a lot to learn, and a many benefits available to anyone who takes these risks. It won't be easy, and results are not guaranteed. That "living on the edge" is what brings out the best in us.

    I suggest if one wants to succeed financially, that is the way to do it.

    Disclaimer: I did not achieve my success in finance, banking, or investing. I did it the old fashioned way, and I worked "hard" for my money. I paid suppliers and contractors first and employees. I got paid what was left. What a wonderful system!

  • Report this Comment On November 06, 2012, at 4:52 PM, TMFUltraLong wrote:

    Darwood11,

    Thanks for the personal story. I can definitely appreciate that since I've made the jump across completely different sectors before.

    TMFUltraLong

  • Report this Comment On November 07, 2012, at 11:13 AM, JustSavvy wrote:

    I enjoyed the article - another part of the picture could be a discussion around automation and worker productivity, which have risen substantially even as average worker pay remains stagnant. This result appears counter-intuitive to me because those factors should reduce the overall labor costs embedded in products, allowing the remaining workers to become more specialized and highly paid. Perhaps the degree of automation has expanded, in many cases, to the extent that minimal training and consequently minimal wages are required to effectively complete previously specialized tasks? This issue isn't entirely clear to me.

    On a side note, I was wondering why you're using a number that clearly misrepresents the average CEO pay by only including the top 350 firms by sales (see note: http://www.epi.org/publication/ceo-pay-231-times-greater-ave... instead of the median value (https://www.census.gov/hhes/www/income/data/earnings/call2us..., which reflects a more realistic 3.1x income multiple.

  • Report this Comment On November 07, 2012, at 11:14 AM, JustSavvy wrote:

    Note that the links appear to be including a closing parentheses, which has to be removed to get the correct pages.

  • Report this Comment On November 12, 2012, at 4:40 PM, Spw225 wrote:

    Solutions include "...raising federal minimum wages...". The author should have called this article, raise the minimum wage, as that appears their primary intent. Minimum wages are essentially price controls. An employer must determine that there is marginal utility in hiring one more worker for all the risk, cost and liability they may endure. With a higher floor on wages, there is a greater hurdle to hiring an unemployed person. Unlike government a business must make a profit to survive. While urging us to raise minimum wages, apparently on a CPI like basis, the author fails to link government's role in causing the described cost increases. There is for example, no comment on the fact the government controls the entire student loan business now, with its own trillion dollar deficit, that Obamacare will control 1/6 of the economy and has already driven heath care costs up by $2500 per family, or that tax policy makes it more cost beneficial to do business overseas. Milton Friedman described the perils of expansive goverment programs and of imposing price controls on minimum wages over 40 years ago. His prediction has come true and we are now in a never ending sprial of increased government regulation and imposed costs, followed by government price controls on wages. And who is surprised that the the poor get poorer, or that government drives the poverty.

  • Report this Comment On November 12, 2012, at 4:52 PM, mdk0611 wrote:

    Basing this discussion on salary rather than total compensation makes this an easy issue to demagogue like Reich did. The health insurance payments made by an employer (and a majority of American workers ARE covered) is just as much a cost to an employer and compensation to an employee as a paycheck. You referenced the costs in your article, but did not take the logical step of plugging that 10.8% annual increase in health benefits to show what the annual rise in total employee compensation is over the period in question.

    In addition, most of the workers earning minimum wage are not working in industries where there has been a significant increase in productivity. I think raising the minimum wage might do more harm than good due to the resultant inflation.

  • Report this Comment On November 12, 2012, at 4:59 PM, BiotechMarc wrote:

    If you factor in employee costs in benefits, the cost of having US employees has grown at a stable rate that has not changed signficantloy in decades. Non wage benefits, mainly health care, are eating it all up. So #2 is dead on. The others seem like good things for a politician to point to, but not an article for data-driven Fools.

  • Report this Comment On November 12, 2012, at 5:08 PM, JohnCLeven wrote:

    Let’s keep this simple. The U.S. is seeing its competitive advantage eroded as other nations have catch up with us economically. This is to be expected. Our advantage in the last century was unique in the history of capitalism and unsustainable over the long term. Globalization is inevitable, and as a result, the standard of living for the average American will continue to drop relative to the standard of living for the average non-American rises. The global labor market is correcting itself. The American worker is now overvalued, and the emerging market worker is undervalued. Americans were on the “good side” of capitalism for the last century and now then pendulum is swinging back. As an American, the best way to protect yourself is to become extremely valuable as a worker, and to make yourself as difficult and costly to replace as possible. Either that or own a successful business.

    A couple other points I’d like to make related to this article:

    -To be a capitalist against outsourcing is hypocritical.

    -Raising the minimum wage will increase unemployment, not the general standard of living.

    -Healthcare is an inelastic market, and bc the human instinct to survive is so powerful, most people, if given the choice, would sacrifice there entire life savings for a few more years of life. That, as well as the demand that hospitals always use the best procedures available, will cause the per capita cost of staying alive to increase as long as life expectancy increases and better (and more expensive) ways to keep us alive continue to be developed.

    -When it comes to labor, there will always be a limited number of good jobs and a large number of crappy jobs. Giving everyone a college degree doesn’t get everyone a good job, it just makes it more difficult, costly, and time consuming for the top tier people to separate themselves from the pack to get to the “good jobs.” If we gave everyone a doctorate, kids would need “super doctorates” to get good jobs.

    This is the new normal. I know that no one wants to hear that, bc it’s depressing as an American, but this is how it is, and you would all do well to prepare accordingly.

    Just my long-winded opinion. Thanks for the article.

  • Report this Comment On November 12, 2012, at 5:40 PM, FlaxSeedOil wrote:

    JohnCLeven is spot on. Instead of lamenting the stagnating wages in the western world why not celebrate the fact that capitalism is wages averages wages on a global scale. This trend will continue, which is good for mankind. We will hopefully see more wealth generation globally, with those getting paid based on the value of their contributions instead of what country they are born in or labor union that they belong to

  • Report this Comment On November 12, 2012, at 5:56 PM, TheDumbMoney2 wrote:

    It's easy to talk about the benefits to global wealth when yours is not the job that has been outsourced.

  • Report this Comment On November 12, 2012, at 6:45 PM, gandalfjrs wrote:

    Are you Nutz? If you think your dollar buys more today than even 2 year's ago you are crazy. Grocery prices are up almost 30%. Everything you buy, today is creeping up in price.

  • Report this Comment On November 12, 2012, at 8:15 PM, hbofbyu wrote:

    @JohnCleven,

    It is not a given that other nations have to catch up with us economically. In fact the opposite should have been a possibility. With a disparity between the US and other countries the gap could have been driven even wider as our prosperity allowed us to become more educated, more advanced, more technologically differentiated and powerful in the world. There is no reason that other countries have to come up while we go down. There are multiple ways we have squandered our wealth but our public education system is an absolute failure by any measure of the developed world.

    In a capitalistic system the rich get richer. Why was that not true for the United States?

    One more thing. If you took healthcare out of the hands of employers and insurance companies and made it a patient-doctor transaction the costs would stop rising immediately and drop until the true equilibrium was found. Contrary to what you say, people will not pay any amount to extend their life by 1 or 2 years. They WILL pay any amount of someone else's money.

  • Report this Comment On November 13, 2012, at 12:13 AM, Melaschasm wrote:

    "In a capitalistic system the rich get richer. Why was that not true for the United States?"

    Historically, capitalism makes it easier for the poor to become rich. Other systems do not reward merit as much, thus leaving old money families in dominant economic positions much longer. The truth of capitalism is that anyone can become wealthy, and the wealthy are less likely to stay that way.

  • Report this Comment On November 13, 2012, at 12:17 AM, TerryHogan wrote:

    I have a laptop collecting dust in my basement that I probably couldn't give away, yet it has computing power and storage capabilities that easily exceeds what $1 million could have bought you 30 years ago, so like @davaidesign pointed out, simple wages are not the whole story. I can also buy a DVD player for $20 at Walmart thanks to them paying mimimum wage.

    Speaking of minimum wage - forget it! In North Dakota MCD pays well over minimum wage, because the opportunity cost of the employees' time is higher. Ditto with Edmonton. If you're working for minimum wage, the problem is your skill set, geographic location, or both. We already subsidize other people's bad decision making enough through our tax dollars, please don't make us subsidize it more through our investment returns.

  • Report this Comment On November 13, 2012, at 1:43 AM, Statistician100 wrote:

    I cannot believe that you have repeated the lie that Congress gives itself a raise every year. They are entitled to automatic increases but they may vote to refuse the raises, and in three of the past five years they have not given themselves cost of living adjustments. This "urban myth" is repeated again and again, on the radio, the TV, by comedians and now by you. What does this say about the credibility of the rest of you piece?

  • Report this Comment On November 13, 2012, at 9:57 AM, 26529 wrote:

    I have an observation that I have never seen discussed in any forum. It seems everything financial is ruled by the percentile (%). It is obvious that this practice can have no other end than to increase the spread between the poor and the rich. If you give a 10% wage increase to a man making $10,000 and a 10% wage increase to a man making $100,0000 the ability to survive in our world becomes oh so much easier for the high earner. He can buy at any source he cares to while the lower earner is relegated to finding survival at the lowest level. Most financial matters are skewered to make it easier for the high earner to increase his earnings/savings if he so desires. The low earner has little such advantage. This is just a thought. I will be interested to see the thoughts of others. Thank you.

  • Report this Comment On November 13, 2012, at 1:45 PM, superbinvesting wrote:

    Several US corporations continue to sit on billions of dollars of cash out of fear and uncertainty and the trend is likely to continue until the fiscal cliff is resolved. The job market is still in a slump and will continue to stay in that pattern unless the fiscal cliff is resolved in the most optimal manner. If the best long term decisions are made on the fiscal cliff, the job market could recover by 2014 with wages recovering slowly after.

    www.ingeniousinvesting.com

  • Report this Comment On November 13, 2012, at 8:12 PM, JohnCLeven wrote:

    @hbofbyu

    We are mostly in agreement.

    1. "It is not a given that other nations have to catch up with us economically. In fact the opposite should have been a possibility. There is no reason that other countries have to come up while we go down." - AGREED, it is a possibility, and other nations don't HAVE to come up. It just appears that that is what is happening.

    2. "There are multiple ways we have squandered our wealth..." - AGREED

    3."...but our public education system is an absolute failure by any measure of the developed world." - UNSURE - Many developed nations also decided whether or not you are eligible for University before you start high school. I don't envy that type of system. I'm not as educated as I should be on the topic. (pun intended)

    4. "In a capitalistic system the rich get richer. Why was that not true for the United States?" - YES AND NO - In nominal terms we're richer than ever. In relative terms, the gap is closing. Like Wal-mart, the U.S. is still top dog, but like wal-mart, Costco (china), and others are catching up and taking market share. And, the richest of the U.S ARE getting richer, it is the unskilled laborers who will be crushed the most.

    5. "One more thing. If you took healthcare out of the hands of employers and insurance companies and made it a patient-doctor transaction the costs would stop rising immediately and drop until the true equilibrium was found." - AGREED

    6. "Contrary to what you say, people will not pay any amount to extend their life by 1 or 2 years." - DISAGREE - When you have that choice, and 3.6 billion years of evolution are causing every cell in your body to scream WE MUST SURVIVE, you WILL give up your capital to appease you instinct.

    7. "They WILL pay any amount of someone else's money." AGREED

    Thanks for the feedback.

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