Wages fail to keep up with inflation

After 3 years of job losses, labor surplus means lack of pressure to raise pay


The amount of money workers receive in their paychecks is failing to keep up with inflation. Though wages should recover if businesses continue to hire, three years of job losses have left a large worker surplus.

"There's too much slack in the labor market to generate any pressure on wage growth," said Jared Bernstein, an economist at the Economic Policy Institute, a liberal research institution based in Washington. "We are going to need a much lower unemployment rate." He pointed out that at 5.6 percent, the national unemployment rate is still back at the same level as at the end of the recession in November 2001.

Even though the economy has been adding hundreds of thousands of jobs almost every month this year, stagnant wages could put a dent in the prospects for economic growth, some economists say. If incomes continue to lag behind the increase in prices, it might hinder the ability of ordinary workers to spend money at a healthy clip, undermining one of the pillars of the expansion so far.

Declining wages are likely to play a prominent role in the presidential campaign. Growing employment has lifted President Bush's job approval ratings on the economy of late. According to the latest New York Times/CBS News poll, in mid-July, 42 percent of those polled approved of the president's handling of the economy, up from 38 percent in mid-March.

Yet Sen. John Kerry, the likely Democratic presidential nominee, is pointing to lackluster wages as a telling weakness in the administration's economic track record. "Americans feel squeezed between prices that are rising and incomes that are not," Mark Mellman, a pollster for the campaign, said in a memorandum last month.

On Friday, the Bureau of Labor Statistics reported that hourly earnings of production workers - non-management workers such as nurses, teachers, food service employees and assembly-line workers - fell 1.1 percent in June, after accounting for inflation. Last month's drop, the steepest decline since the depths of recession in mid-1991, came after a 0.8 percent fall in real hourly earnings in May.

Coming on top of a 12-minute drop in the average workweek, the decline in the hourly rate cut deeply into workers' pay. Last month, production workers took home $525.84 a week on average. After accounting for inflation, this is about $8 less than they were pocketing last January, and the lowest level of weekly pay since October 2001.

On its own, the decline in workers' wages is unlikely to derail the recovery. Though they account for some 80 percent of the work force, they contribute much less to spending. Mark Zandi, chief economist at Economy.com, a research firm, pointed out that households in the bottom half of income distribution account for only one-third of consumer spending.

Nonetheless, coming after the bonanza of the second half of the 1990s, the first period of sustained real wage growth since the 1970s, the current slide in earnings is a big blow for the lower middle class. Moreover, the absence of lower-income households could also weigh on overall economic growth - putting a lid on the mass market and skewing consumption toward high-end products.

"There's a bit of a dichotomy," said Ethan S. Harris, chief economist at Lehman Brothers. "Joe Six-Pack is under a lot of pressure. He got a lousy raise; he's paying more for gasoline and milk. He's not doing that great. But proprietors' income is up. Profits are up. Home values are up. Middle-income and upper-income people are looking pretty good."

So far, spending has been fueled mostly by debt, with consumers taking advantage of low interest rates to whip out credit cards and refinance mortgages. But as interest rates rise to keep inflation in check, growth in consumer spending will depend more on jobs and wages.

Spending is still holding up, led by strong corporate profits as well as higher salaries and bonuses at the upper end of the income distribution. But the lagging earnings at the bottom end are making for a somewhat lopsided expansion.

The upper echelons of consumer spending, at places such as Saks Fifth Avenue, Neiman Marcus and Nordstrom department stores, are reporting gangbuster business. But at the other end, sales at stores open at least a year at discounters such as Target and Wal-Mart have disappointed, while sales of used cars are declining, government figures show.

Wages at the bottom should eventually recover, as businesses hire to meet growing demand. "As unemployment slides down, more of the benefits of growth should flow to the working class," Bernstein said. "But not until we reach truly full employment are they likely to see their earnings rise at a level closer to that of productivity."

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