Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Why Are Wage Gains So Weak? Because You Can't Wave a Wand to Raise Productivity

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Why Are Wage Gains So Weak? Because You Can't Wave a Wand to Raise Productivity

Article excerpt

After correcting for inflation, wage gains remain sluggish. In April, average weekly earnings for nonsupervisory workers were up 3% from a year earlier, to $785.55. Meanwhile, prices as measured by the consumer price index were up 2%. Considering that the economy has been expanding for nearly a full decade - a record if it continues through June - this is perplexing, even allowing that wages are growing faster at the top than in the middle.

Theories abound to explain wage behavior. Average workers (it's said) still recall the ferocity of the 2007-09 recession and are more reluctant to chase higher wages by leaving their present jobs. For similar reasons, employers resist large wage gains. They want to remain competitive in another recession. Both are willing to trade stronger job security for slightly lower pay.

Other theories blame sluggish wage growth on changes in the labor market. The decline of unions - a phenomenon that stretches back to the 1960s - has weakened workers' bargaining power. Globalization has had the same effect, because in many industries production can be moved abroad where wages are lower. China is an obvious example.

Weak productivity gains amplify the effect. In the long run, strong productivity improvements are the source of higher wages and salaries. From 2010 to 2017, annual productivity increases averaged only 0.5%, according to the Bureau of Labor Statistics. This compared with a post-World War II average of 2%. Slower productivity advances mean smaller increases in labor compensation for most workers.

We now have a new theory from the McKinsey Global Institute, the research arm of the McKinsey consulting company. It's long been known that the labor share of national income (GDP, for gross domestic product) has been shrinking. In 1947, the labor share was 65.4% of GDP; in 2016, it was 56.7% of GDP. …

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