"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.
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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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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