With the US unemployment rate at the lowest level in a generation and many industries reporting labor shortages, US wages are supposed to be rising. They aren’t.
For the past two years, inflation-adjusted average weekly earnings of US workers barely have risen with respect to the previous year. Low wage growth contributes to low inflation, which frustrates the Federal Reserve and most of the economics profession.
A large part of the explanation – and perhaps the largest part – is that the American population is aging, workers are retiring later and critically, older workers of 55 years and over have far lower wage gains than younger workers.
Older workers tend to be more risk-averse, prize job security over wage gains and are less likely to switch jobs in pursuit of a pay increase. The impact of risk-aversion on wage gains was first suggested to me by Professor Edmund Phelps of Columbia University, a Nobel Laureate in economics.
Low productivity growth, including the shift of the labor force into such low-productivity service industries as health care, leisure and retail, is usually cited as the cause of sluggish wage growth. No doubt there is some truth to this.
Nonetheless, we can observe in the data the effect of the aging of the US population on wage growth.
The proportion of the workforce 55 years and older has doubled over the past 20 years, from around 12% in 1997 to 24% in 2018.
Part of this is due to an aging population and part is due to a higher level of participation in the labor force by older workers, either because they are healthier than earlier generations and more able and willing to work, or because they cannot retire comfortably on existing resources.
The Atlanta Federal Reserve tracks wage gains for workers. This measures something different than average weekly wage gains, which reflect changes in the composition of the workforce, among other things.
The Atlanta Fed data separate wage data by age, education, profession and so forth. As the chart below makes clear, older workers have far lower wage gains than younger workers.
Wage increases for workers aged 55 and over were only 2% year-on-year at last count, less than the headline rate of inflation, while wage gains for workers aged 25-54 were at 3.5%.
Whether the difference stems from risk aversion, as I suggested above, or differential skill levels, or yet some other factor, is a matter of conjecture. What is clear from the data is that the demographic shift depresses wage gains.
Or perhaps low wage growth is due to globalisation.
Perhaps the racial demographic shift is contributing.
Asian groups may have high average incomes, but blacks and Hispanics do not. As for whites, who are still a majority of the US population, they make up a disproportionate share of minimum wage workers, which must have some effect on overall levels.
0.5rmb for you big sausage idiot!
No Michael, there is a simple explanation, the US gubment just stopped caring. Its been this way since the de-industrialisation and outsourcing policies in effect since the 80’s. The care factor is zero!
Presumabley older workers are no longer increasing their productivity. In many cases their skills are degenerating and they are being overpaid. When they lose a job they must take a lower paying position. Some union contracts may be giving automatic raises to that segiment but outside the public sphere I can believe the increased percentage of seniors is keeping a lid on wage inflation.
Anecdotally, I see more retirees taking what would be entry level jobs to supliment social security. I wonder what that stats are.
As demos change, the gub’s objects of affection change.
It wants to get re-elected, after all.
This is good news for Trump! When the lower 99 will accept lower wages, manufacturing jobs will return.
There is no evidence that low wage growth is due to deindustrialization. Manufacturing wage growth is just as low as service wage growth. See https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx?panel=1. One can argue that international competition drives down wages for tradeable goods, but why should we then observe an identical pattern for nontradeable services?
David, those millions of dirty polluting industrial jobs which went hand in hand with millions more who worked in the offices got outsourced and were not replaced. I am surprised you keep over looking this elephant in the room. Gone are those skilled machinists, the CNC machine operators, the draftsmen, the engineers, the designers the software coders and programmers, and the tens of millions of general factory staff. These guys never got retrained, because there were no new jobs for them. Now they’re all sitting in China and increasingly in India.
The real facts of life as it relates to real people.
Real unemployment is much higher than the official figures, especially due to the fact that not all jobs are equal. Many McJobs today would not be considered real jobs by most people a generation ago. Part time, no benefits, low wages. Even here, employers set out tip jars instead of paying decent wages. "Suggestions" for tips run up to 25%. Workers can’t retire; their pensions were stolen over the past decades. Wages don’t go up because employers don’t have to raise wages. Workers can’t demand wage increases because they have no power; Unions have been wrecked. Half the people can’t handle an unexpected $500
@ David
One can argue that international competition drives down wages for tradeable goods, but why should we then observe an identical pattern for nontradeable services?
Answer. Labor force competition. The lower wages for tradeable goods, creates higher competition for the jobs in the non tradeable services sector. The increase supply of workers seekin those jobs, will lower the pay that is offered in the non tradeable goods sector. Only for positions and skills in which are specific and non transferable would wages not be decreased (lower competition for those positions.