Since the recession started in December 2007, a great deal of attention has been paid to the dramatic loss of jobs, decline in hiring, and the resulting high unemployment in the U.S. labor market. It is important to note, however, that the damaging effects of high unemployment are not just felt by the workers (and the families of workers) who have lost jobs. Workers who have kept their jobs or found new work during this downturn have also suffered from a broad-based collapse of wage growth over the last two years. And with unemployment expected to remain elevated for many years to come, we do not expect the suppression of wage growth to ease anytime soon.
This erosion of wage growth will only compound the deterioration of incomes and living standards that occurred over the course of the 2000-07 business cycle. Productivity growth far outpaced compensation in the 2000-07 business cycle, especially during that cycle’s recovery (2002-07). Economists generally assume that faster productivity growth generates higher living standards through increased average compensation, but from 1995 to 2007, the disconnect between productivity and compensation growth was dramatic, particularly during the 2002-07 recovery. From 2002 to 2007, productivity grew 11.0%, but the hourly compensation of the typical high-school- and college-educated worker actually fell. In other words, the disconnect between pay and productivity in the years leading up to the current downturn encompassed a broad swath of the workforce, with neither the median high school graduate nor the median college graduate capturing the benefit of the economy’s productivity growth.