Today, we released a report analyzing the most recent reliable data on wages by decile and by educational attainment. These data are illuminating because they look beneath the overall averages presented in the regular statistical series covered by the media. On the one hand, these recent data look quite a bit like the couple of years of data that come before it—but that is still very revealing of what’s going in the economy.
Overall, the trends over the last year—from the first half of 2013 to the first half of 2014—show that real, inflation-adjusted wages fell up and down the entire wage scale, with one revealing notable exception. The recovery has not been completely jobless for a while now, but it does continue to be pretty much wage-less, or at least wage-growth-less.
Let’s start at the top of the wage distribution: those workers with the most education and the highest wages. Over the last year, real wages at the top of the wage distribution fell, by 2.0 percent at the 90th percentile and 0.7 percent at the 95th percentile. Real wages also fell for workers with a 4-year college degree, and even for those workers with an advanced degree. This is important in particular because it sends a clear message to the Federal Reserve Board. If even these groups of highly educated workers facing the lowest unemployment are seeing outright wage declines, there is clearly lots of slack left in the American labor market, and policymakers—particularly the Federal Reserve—should not try to slow the recovery down in an effort to keep wage and price inflation in check: they’re both already firmly in check even for the most privileged workers.
Now, let’s turn to the middle of the wage distribution. The fact is, if we care about middle class incomes and living standards, we need to care about paychecks. In fact, reliance on paychecks for living standards is pretty much a decent definition of middle-class. Over the last year, median real wages have declined, a signal that median incomes will likely also falter into 2014 (we’ll get data on median incomes for 2013 in a few weeks). Over the entire 1979 to 2013 period, median real wage growth would have been negative if not for the tight labor market of the late 1990s. This dismal middle-class wage growth was despite a substantial rise in in economy-wide productivity over this same period, including over this last year as real wages fell. Productivity, of course, is simply a measure of how much economic output and income is generated in an hour of work on average in the economy, and it has risen by roughly 65 percent since 1979, yet employers have not put increased productivity into workers’ paychecks over this time. This divergence between pay and productivity is at the root of stagnant wage growth, slow family income growth, and rising wage and income inequality.
Over the last three and a half decades, incomes for the broad middle class have failed to reach their potential. There is a growing wedge between economy-wide average income growth and income growth of the broad middle class. By 2007 (the last year that middle-class incomes weren’t battered by the Great Recession and its aftermath) this wedge had grown so large that it cost middle-income families nearly $18,000 in that year alone. What happened after 2007 showed that we can’t have a stable economy and a growing and thriving middle class without growing wages.
Moving to the bottom of the wage distribution, we see one glimmer of positive news over the past year. Unlike the rest of the wage distribution, wages did not fall at the 10th percentile between the first half of 2013 and the first half of 2014. Why did wages fall for everyone except for the bottom? The answer is simple: we still have some labor standards that provide wage protections. Several states, which make up of 40 percent of the workforce, increased their minimum wage in the first half of 2014 (either through legislation or through automatic inflation adjustments). When we look at the 10th percentile wages between states with and without a minimum wage increase, we see a distinct divergence in trends. It is clear that the minimum wage is the only reason the 10th percentile wage didn’t see the negative trends found elsewhere in the distribution. At the same time, it is great news that policy can actually affect the labor market. It is imperative that we use all the policy levers at our disposal to help rejuvenate the economy to create jobs and build stronger income growth for the 99 percent.
The ongoing economic debate today mostly concerns the Fed and how much slack remains in American labor markets. The last year’s data reinforces those in that debate arguing that much slack remains and the Fed should keep their foot off the brake. But the historical data trends also provide important perspective on the Fed debate that is too often overlooked. Too many have overreacted to blips in high-frequency data, squinting hard to find signs of coming wage inflation. What the longer term trends tell us is that in the past generation wages have shown no tendency to leap forward and spark inflationary spirals. Instead, they have shown a stubborn failure to rise anywhere near economy-wide measures of productivity. And this sluggish wage growth is not an accident—instead it’s because policy has been tilted hard against low and moderate-wage workers and towards corporate managers.
Right now, and for most of the past generation, employers have held most of the cards. Restoring wage growth means dealing employees a stronger hand vis-à-vis their employers. In the near-term, this means allowing the recovery to get back to genuine full-employment—nothing saps workers’ ability to negotiate effectively for higher wages like a bunch of willing replacements lined outside their bosses’ door and the inability to leave to get a better job. In the longer-term, we need to enact policies that take the thumb off the employers’ side of the scale. This includes raising the minimum wage, strengthening workers ability to form unions, reducing wage theft, updating overtime provisions, and ending misclassification of employees as independent contractors. We know that wages can increase with a tighter labor market, and we need to do what we can to continue to stimulate the economy.