Workers Aren’t the Only Ones Waiting for Wage Growth

Decades of stagnant pay is costing states and localities tax revenue.
by | March 2015

By some measures, the national economic recovery is churning along. Job creation has picked up in recent months, and the economy has been growing at its fastest clip in more than a decade. One area that has yet to improve, though, is wages. That’s a concern that carries major implications for state and local governments that rely on higher wages to bolster their revenue from income and sales taxes.

Real average U.S. wages -- those adjusted for inflation -- have remained essentially flat for decades. Last year, average monthly real hourly earnings rose just under 0.5 percent. A review of the latest Labor Department data indicates average inflation-adjusted earnings for private-sector workers are currently below pre-recession levels in about half of the states.

The unemployment rate has steadily fallen in recent years to 5.7 percent for January -- just above what the Federal Reserve considers full employment. Economists typically expect a bump in wages to coincide with unemployment declines, since employers face more competition for workers. Historically, wage growth lags behind unemployment rate declines by up to a year during a recovery period, but it’s taking much longer this time around.

Even in some states that have surpassed pre-recession job totals, wages haven’t yet increased. Consider Texas. The state’s payrolls have expanded by about 12 percent since 2007 -- second only to North Dakota among the 50 states. But average inflation-adjusted wages in the Lone Star State have not grown at all. Alaska, New York and Utah similarly have posted some of the better job gains during the recovery, yet their average private-sector hourly earnings actually have dropped slightly from pre-recession levels when adjusted for inflation.

The delay in wage growth among middle- and lower-income families constrains state budgets, especially when it comes to sales taxes. It’s those families that spend rather than save a large share of their income, says Michael Leachman, director of state fiscal research at the Center on Budget and Policy Priorities. But only workers in the top income brackets have enjoyed wage hikes in recent years. These higher earners spend more of their money on services or online purchases that are effectively tax-free in many states. “Stagnant wages for middle- and low-income people have damning effects for tax revenues,” Leachman says.

So what’s to explain the slow wage growth? For one, the job market might not be tight enough yet. Although the unemployment rate has fallen, some economists contend that large numbers of workers who dropped out of the labor force are open to returning to work. If this is the case and employers can readily fill jobs, workers aren’t in much of a position to bargain for a raise.

Another common explanation suggests much of the job creation is occurring in low-wage sectors, such as leisure and hospitality. But the numbers show that just about all industries across the board have experienced little or no wage growth.

Wage recovery in individual states is largely tied to the performance of their industries. In Southern states, for example, nondurable goods manufacturing accounts for a large share of economic activity. Many of the jobs in these industries, typically low-wage positions, have either been outsourced or lost in plant closures over the years. Much better-paying auto manufacturing jobs are experiencing strong wage growth in parts of the South, but there aren’t enough of them to push up overall wages, says Ahmad Ijaz, a University of Alabama economist.

Sarah House, a Wells Fargo economist, says signs are hinting that wage growth will start to pick up this year. In December, the National Federation of Independent Business issued its most encouraging report since 2006, finding a growing number of firms reported plans to raise employee compensation. “Given the environment in the labor market, we think we’re probably getting close to burning a lot of the slack,” House says. “[Wage growth] might not be quite as much as what the Fed would like to see it at, though.”

It’s also possible that wages for most Americans will remain flat because of fundamental changes to the economy. Former U.S. Labor Secretary Robert Reich wrote earlier this year that the link between declining unemployment and wage increases has been “severed.” In an era of globalization, he argues, companies can trim payroll costs by outsourcing jobs overseas. Meanwhile, the decline of labor unions has weakened workers’ bargaining power even as productivity has increased. Robots and new technologies, Reich writes, are starting to take over duties once performed by humans, a trend many predict will only become more common in the years to come.