Wages Are Increasing, But What's Behind It?

Dec 29, 2016
Originally published on December 29, 2016 1:17 pm

The Great Recession ended 7 1/2 years ago, and job gains have been steady since, but greater demand for workers is only starting to increase pay.

The increases are still relatively modest, and the data are still mixed. In October, for example, the Labor Department reported average hourly earnings increased at a 2.8 percent rate — the highest since mid-2009, but wage growth slowed in November. A separate report this month showed the cost of labor — another measure of wage growth — increased especially during the spring of this year.

What's driving the recent wage growth is unclear.

"The mystery has been that we've seen a decline in the unemployment rate, but we haven't seen the kind of increases in wage growth that we would expect," says Michael Strain, director of economic policy studies at the conservative American Enterprise Institute.

He speculates that until recently, employers figured they didn't have to increase wages, because in recent years so many people had stopped working or looking for work.

"Businesses kind of have the sense that [the missing workers] are out there — they are a pool of available workers — so that has, I think, suppressed wage growth," Strain says.

This year, that finally appears to be changing, and Strain and others believe wage growth will continue into next year, chiefly because the supply of labor is declining. The unemployment rate, at 4.6 percent, is near a level economists say is close to a "natural" unemployment rate.

New state and local minimum wage laws are another reason wages are rising. Since 2014, 21 states and Washington, D.C., changed their minimum wage laws. Last month, voters approved initiatives in Arizona, Colorado, Maine and Washington state. And more increases are expected in the coming year.

Strain says those increases have a ripple effect beyond just the lowest paid workers. Many union contracts, for example, benchmark to the minimum wage.

"There's no question minimum wage increases cause wage growth to accelerate," he says. "How much of that can be attributed to minimum wage increases is an open question."

In Anggie Godoy's case, minimum wage hikes made a big difference. She started working as a McDonald's drive-through cashier three years ago, making $8 an hour. Since then, the Los Angeles City Council raised the minimum wage to $10.50. Without the city's new law, Godoy says, she would only have seen a tiny increase.

"Working three years there, I only got a 10-cent raise," she says.

Godoy, who participated in fast-food workers' strikes demanding a $15 hourly wage, says that as her wages increased, so did wages for those in more senior positions.

Andrew Chamberlain, chief economist for online job site Glassdoor, says Godoy is right.

"Like dominoes up the pay scale, you see wage hikes all across the board," he says.

But minimum wage isn't the biggest factor, Chamberlain says, citing Glassdoor's data that show the most in-demand jobs are those whose pay is increasing fastest: truck drivers, construction workers and machine operators. That is not true for some white-collar jobs — sales jobs and financial analysts, for example, which are losing ground.

"Clever coders are finding ways to program around them," Chamberlain says. "Insurance agents today are largely being replaced by self-service insurance websites."

David Levine, CEO of the American Sustainable Business Council, a progressive advocacy group, says increasing pay can be a way to address another labor-market problem: low productivity growth.

"With that retention they're also getting employees that are more committed to the business, therefore productivity goes up," he argues.

Simply put: You pay more to get more.

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It's taken years, but in 2016, wages finally started to go up. NPR's Yuki Noguchi explains.

YUKI NOGUCHI, BYLINE: The Great Recession ended seven and a half years ago, and job gains have been steady since. But the greater demand for workers is only starting to increase pay.

MICHAEL STRAIN: The mystery has been that we've seen a decline in the unemployment rate, but we haven't seen the kind of increases in wage growth that we would expect.

NOGUCHI: Michael Strain is director of economic policy studies at the American Enterprise Institute. He speculates that, all this time, employers figured they didn't have to increase wages.

STRAIN: A lot of people have left the workforce and are no longer exerting upward pressure on the unemployment rate because they're not actively looking for work. But businesses kind of have the sense that they're out there, they are a pool of available workers. So that has, I think, suppressed wage growth.

NOGUCHI: But wage growth did pick up this year, and economists say there are reasons to believe it will continue to. The biggest reason is simply that the supply of labor is declining. The unemployment rate is near a level economists say is close to a natural unemployment rate. Simply put, that means employers are having to shell out more to attract and retain workers. New state and local minimum wage laws are another reason wages are rising. Since 2014, 21 states in Washington, D.C., changed their minimum wage laws. Last month, voters approved initiatives in Arizona, Colorado, Maine and Washington. AEI's Michael Strain says those rate increases have a ripple effect beyond just the lowest paid workers. Many union contracts, for example, benchmark to the minimum wage.

STRAIN: There's no question minimum wage increases cause wage growth to accelerate. How much of that can be attributed to minimum wage increases, I think, is a more open question.

NOGUCHI: In Anggie Godoy's case, minimum wage hikes made a big difference. She started working as a McDonald's drive-thru cashier three years ago making $8 an hour. Since then, the Los Angeles City Council raised the minimum wage to $10.50. Without the city's new law, she says, she would only have seen a tiny increase.

ANGGIE GODOY: Working three years there, I only got a 10-cent raise.

NOGUCHI: Godoy, who participated in fast food worker strikes demanding a $15 hourly wage, says, as her wages increased, so did those who were in more senior positions.

GODOY: When the bottom rises, everybody is going to rise, too.

NOGUCHI: Andrew Chamberlain, chief economist for online job site Glassdoor says Godoy is right.

ANDREW CHAMBERLAIN: Like dominoes up the pay scale, you see wage hikes all across the board.

NOGUCHI: But Chamberlain says minimum wage isn't the biggest factor. He says data suggest wages are growing fastest where demand is strongest. Pay for truck drivers, construction workers and machine operators is surging - not so in some white-collar jobs. Sales jobs and financial analysts, for example, are losing ground to technology.

CHAMBERLAIN: Clever coders are finding ways to program around them. Insurance agents today are largely being replaced by self-service insurance websites.

NOGUCHI: David Levine is CEO of the American Sustainable Business Council, a progressive advocacy group. He says increasing pay can be a way to address another labor market problem - low productivity growth.

DAVID LEVINE: With that retention, they're also getting employees that are more committed to the business. Therefore, productivity goes up.

NOGUCHI: Simply put, you pay more to get more.

Yuki Noguchi, NPR News, Washington. Transcript provided by NPR, Copyright NPR.