Weak Recovery Claims New Victim: Workers’ Wages

by Jared Bernstein and Lawrence Mishel

As has been widely reported, the current economic expansion has been the weakest on record in terms of job growth.¹ There is, however, a related cost to this persistent job-market weakness that is only now becoming apparent: the slowing of wage growth.

A historical analysis of wage trends reveals that they carry a lot of momentum. Wage growth neither accelerates as soon as the job market begins to tighten, nor does it falter as soon as jobs become scarcer. It takes a long time—a year or longer—for these job market dynamics to begin to shift wage trends one way or another. Unfortunately, this means that once the weak labor market does affect wages, it can lead to earnings stagnation and even real losses, as wage growth falls behind inflation.

The following charts and tables show precisely this phenomenon at work in the current U.S. economy. The jobless recovery has persisted long enough to dampen wage growth, and in some cases, wages are even falling in real terms, eroding living standards for some working families despite the fact that they have maintained their employment.

An analysis of the data makes two points clear:

• Inflation-adjusted hourly wages fell for middle- and low-wage men and women, making 2003 the worst year for wage growth over the 1998-2003 period.
• Despite the acceleration of gross domestic product (GDP) growth in late 2003, the wage growth of production, non-supervisory workers (over 80% of the workforce) actually slowed in this period.

High unemployment slows median wage growth

The examination of real wage trends—that is, wages adjusted for inflation—is the best way to track the impact of the weak job market on living standards. But because inflation is driven by many other forces—such as rising oil prices or health care costs that are not directly related to labor market conditions—to most directly gauge the impact of labor market conditions on wages, nominal wages (i.e, actual wages without any inflation adjustment) must first be examined.

Figure 1 shows the annual growth in the nominal weekly earnings of full-time workers (see the data appendix for more detail) as well as the growth in inflation from 1994 to 2003. Real wage growth is the difference between these two factors for each year. Starting around 1996, wage growth accelerated sharply from 2.3% to 5.0% in 1999. Note that wages grew far faster than prices in these years, resulting in significant real wage gains in the 1997-2000 period.

Thereafter, the rise in unemployment that began in 2001 and the labor market slack that persists to this day adversely affected wage growth. In 2001, wage growth slowed to 3.6% and then fell sharply to 1.8% in 2002. It grew at about this rate in 2003 as well, generating two years of historically slow wage growth. But because inflation grew by 2.3% in 2003, the 2.0% growth in median weekly wages meant that wages fell slightly in real terms in 2003 for the first time since 1996.

Stagnant and declining wages for low- and middle-wage workers

Table 1 reports on real wage changes for adult full-time workers (25 years and older) at different parts of the wage scale (e.g., low-, middle-, and high-wage workers) and by gender from 1998 to 2003. Last year (2003) stands out as the worst year for wage growth in the 1998-2003 period. Looking at all workers (top of Table 1) reveals stagnant or falling real wages across the entire wage scale. Table 1 also shows a fall in real wages for low- and middle-wage men and stagnant or slightly negative real wage growth for low- and middle-wage women. 

The addendum to Table 1 shows real hourly wage changes for two other wage series published by the Bureau of Labor Statistics, confirming the pattern shown in the weekly earnings data. The first column shows decelerating hourly wage growth for production, non-supervisory workers (the 80% of the workforce that are blue-collar workers in manufacturing or are non-managers in services). The second column shows the wage component of the Employment Cost Index. In both series, 2003 is tied with 2000 for the slowest real growth rate (in nominal terms, the 2003 rate was the lowest2) since 1998.

Figure 2 provides another look at the slowing of wage growth over the past year, comparing the annual growth of real earnings by gender over two time periods, 1995-2002 and 2002-2003. The first set of bars in the graph is uniformly positive, as real weekly earnings grew at each percentile for both men and women. But in 2003, real earnings fell for middle- and low-wage men, and they were stagnant for women in the bottom half of the wage scale. Only high-wage women saw continued gains, though at less than half the rate of the 1995-2002 period.

Wage growth slows late in 2003 despite stronger GDP growth

Figure 3 shows annual changes in quarterly data, allowing for a closer examination of the changes occurring within recent years and especially in the last half of 2003. The figure examines two of the nominal series featured above: production worker hourly wages and median weekly earnings of all full-time workers. Though the latter series is more volatile, both series grow more slowly as the weak recovery proceeds. The production worker series in particular consistently decelerates through 2003. Note that, even though there was an acceleration of gross domestic product growth in the last half of 2003 (8.2% in the third quarter and 4.0% in the fourth), wage growth actually slowed in this period.

Conclusion

Despite the fact that it is now over two years since the economy began growing after the downturn that lasted from March to November 2001, the U.S. economy has yet to achieve significant or sustained job creation. In fact, 33 months into this business cycle there are 1.8%, or 2.4 million, fewer jobs than when the recession began. This lack of job growth has been well documented, but its negative impact on the growth of wages has received little attention.

The evidence shows that the persistently weak labor market has reversed the positive wage trends that prevailed towards the end of the last recovery. The slack labor market has hurt both the jobless as well as those who held onto their jobs. The disappointing wage growth in 2003, which resulted in real wage declines for many workers, will continue to beset working families because it will take several quarters of robust employment growth and falling unemployment to once again spark wage growth.

—Research assistance provided by Yulia Fungard.

Data Appendix

Figure 1: Wage data are based on annual percent changes of the median weekly earnings of full-time wage and salary workers who are age 16 and older. Source: Bureau of Labor Statistics, “Usual Weekly Earnings of Wage and Salary Workers,” various issues. Inflation is CPI-Research Series, available at http://www.bls.gov/cpi/cpirsdc.htm.

Figure 2: See note to Figure 1 above but for workers age 25 and older.

Figure 3: Source same as top three panels of Table 1.

Table 1: Data have the same source and sample as in Figure 1, but are for persons age 25 and older. Production, n
on-supervisory hourly wage data and Employment Cost Index data (wage and salary component) are also from BLS.

Endnotes

1. See payroll employment chart and analysis at www.JobWatch.org.

2. For the production worker series, nominal wages rose 3.9% in 2000 and 2.9% in 2003; for the ECI wage and salary, growth was 4.0% in 2000 and 2.8% in 2003.