Sluggish wages keep economy from rallying

Stagnant pay deters consumer spending

New data paint bleak picture

Loss of gains from stocks also hindering recovery


Although the recession has ended, the wages of more than 100 million workers are still stagnant, endangering the consumer spending that sustains the fragile recovery.

The stagnation in total wages paid to the nation's employees outside of government has lasted a year, according to newly revised government data, which paint a bleak picture of the economy. The rising cost of company-sponsored health insurance is also taking a bite out of take-home pay. Rather than pay the premium increases, companies are deducting much of the additional cost from employee paychecks.

The recovery's survival might be riding on how people perceive these constraints on their wages, which they are just beginning to notice, says Richard T. Curtin, director of the University of Michigan's Surveys of Consumer Sentiment. "People are telling us about smaller paychecks," he said. Meager raises or no raises are a problem for them, he added, "but what they are really noticing is the loss of overtime hours, which effectively lowers their income. And they are beginning to cut back on spending."

Not everyone accepts the new wage revisions published by the Commerce Department as proof of stagnation. A broader measure of personal income, one that includes items such as Social Security benefits and unemployment insurance as well as wages, has risen recently. Some forecasters have seized on this improvement to argue that the economy is generating enough new income to strengthen the recovery by early next year.

But there is an obstacle to optimism. The personal income numbers, while broader than wages, do not include capital gains from the sale of stock. This huge source of income in the late 1990s has shrunk considerably since early last year, judging from the shortfall in expected tax payments April 15, economists at the Congressional Budget Office say.

`A grinding slowdown'

The bottom line of the various conflicting numbers is that they seem to cancel each other out, leaving insufficient income growth, for the moment, to convert a weak economy into a strong one. "What we have is a grinding slowdown in the incomes that people have available to spend, from whatever the source," said Lee Price, chief economist for the Senate Budget Committee.

Some workers have resisted the downward pressure on their wages, only reluctantly agreeing, for example, to scale back raises in exchange for company payment of most of the increase in health insurance premiums. That is the concession that 2,700 employees of the Hershey Food Corp. accepted in June, after a six-week strike. In a weak economy, with unemployment rising, the bargaining power of the nation's wage earners has diminished.

"We see two reasons why employers will ask their workers to pay a bigger portion of the health insurance increase this year than in past years," said James Foreman, a managing director of Towers Perrin, a consulting firm that specializes in compensation. "Profits are squeezed, so employers have to shift more of the cost to employees, and it is harder and harder to get a job, so companies don't have to worry about employees going somewhere else."

110 million affected

The stagnation in the nation's total wages and salaries, adjusted for inflation, affects 110 million workers, most of them below management ranks. It results not only from meager raises but also from cutbacks in hours, the disappearance of nearly 1.7 million jobs since March of last year and the rise in the unemployment rate, which stands at 5.9 percent. Until these problems developed, the total outlay for private-sector workers had climbed by more than 5 percent a year starting in 1997, reaching a peak annual rate of $4.190 trillion, adjusted for inflation, in the fourth quarter of 2000.

And then, during the next year -- much of it while the economy was in recession -- $94 billion in pay disappeared, with only $9 billion recovered in a mild rebound this year.

"It is really amazing how stretched out the wage deceleration has been," said Jared Bernstein, a labor economist at the Economic Policy Institute. "It is testimony to how much upward pressure on wages there was in the tight labor markets of the boom years, and how much time it is taking to unwind that pressure."

Translated into production and spending, the wages and salaries lost were almost enough to shave a full percentage point off economic growth, which helps explain why the economy grew at an annual rate of only 1.1 percent from April through June. The $4.1 trillion in wages and salaries represents almost 40 percent of the nation's economic activity.

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