Hourly Pay in U.S. Not Keeping Pace With Price Rises

July 18, 2004


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 noted 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 may 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 current 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 Senator 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 - nonmanagement workers ranging from nurses and teachers to hamburger flippers and assembly-line workers - fell 1.1 percent in June, after accounting for inflation. The June 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 last month cut deeply into workers' pay. In June, 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 is 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 M. Zandi, chief economist at Economy.com, a research firm, noted 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 1990's, the first period of sustained real wage growth since the 1970's, 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."

Tales of tight budgets at the bottom are springing up across the country. "I haven't had a salary increase in two years, but the cost of living is going up," said Eric Lambert, 42, a father of three who earns $13 an hour as a security guard at 660 Madison Ave. in Manhattan.

Silvia Vides, 43, who earns $11 an hour in a union job as a housekeeper at the Universal City Sheraton hotel in Los Angeles, said, "Sometimes I don't know how I pay the bills and food and rent." She has cut back on all nonessential expenditures and she is four months behind on payments on $4,000 in credit-card debt.

Their woes are a product of supply and demand for labor. From 1996 through 2000 when employers were hiring hand over fist, real hourly wages of ordinary workers rose by 7.5 percent. Those for leisure and hospitality workers rose 9.6 percent, and retail workers' climbed 8.9 percent. The raises continued even as the economy slipped into recession in 2001 and businesses began to shed workers.

From 2001 to 2003, 2.4 million jobs were eliminated, as businesses sharply reduced their work forces, refusing to hire back even as demand started picking up. Over a million of these jobs have been regained this year.

Yet with the lowest number of people employed as a share of the population since 1994, there is still a plentiful supply of unused laborers looking for jobs.

As the rise in energy prices in the earlier months of this year led to rising inflation, pushing prices in June up 3.2 percent from the same month of last year, the lackluster job market has left workers in a weak position to demand more money.

"Since last November, we've had a pickup in hiring and a pickup in hours worked in virtually all of our businesses," said David Pittaway, a senior managing director at Castle Harlan, an equity investment company that owns everything from Burger King franchises to a shipping company.

But there is clearly still a lot of slack. When Castle Harlan advertised in the newspapers to fill 70 to 80 positions at a Morton's restaurant it opened in early July in White Plains, 600 to 700 people showed up.

Ms. Vides in California ticks off the items of a rising cost of living. She pays $850 a month for a one-bedroom apartment in Panorama City, $25 more a month than last year. The cost of a bus pass rose $10, to $45 a month. The electricity bill is much higher and food costs more. "I've got to do miracles with my salary," she said.

So Ms. Vides said she was outraged that the hotels negotiating a new contract with her union were offering annual raises of 40 cents to 45 cents an hour each year for the next five years. The raise in 2004 would be about 4 percent, just enough to keep up with the 4 percent rise in prices in Los Angeles over the last year. "This is miserly," said Ms. Vides, who said the union wants $1.25 this year and $1.50 next.

Colleen Kareti, president of the Los Angeles hotel employers' council, which represents the hotels, argued that negotiations had not yet gotten down to bargaining over wages. But she pointed out that times are hard for the hotel business, too. "It's been pretty bad for the last three years. We're nowhere near the levels of business where we were in 1998 through 2000," Ms. Kareti said.

Some economists warn that if wages remain depressed for a long time they may end up weighing on the economy. "The recovery will likely continue on despite the travails of lower-income households, but it cannot flourish," Mr. Zandi said.

So far, spending has been fueled mostly by debt, as consumers took advantage of bedrock-low interest rates to whip out their credit cards and refinance their mortgages. But as interest rates rise to keep inflation in check, continued 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 like Saks Fifth Avenue, Neiman Marcus and Nordstrom department stores, are reporting gangbuster business. "I'm surprised by how well we've sold high-priced fashion at this stage," said Pete Nordstrom, president of Nordstrom's full-line stores.

But at the other end, sales at stores open at least a year at big-box discounters like Target and Wal-Mart have disappointed, while sales of used cars are declining year over year, government figures show. "We're not seeing the traffic, not even the same volumes of sales calls," said Richard Cooper, a sales manager at Jones Ford in Charleston, S.C.

Wages at the bottom should eventually recover, as businesses continue hiring to meet growing demand. The question is how fast. "As unemployment slides down, more of the benefits of growth should flow to the working class," Mr. 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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