U.S. Wage Growth: The Downward Spiral

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Intense competition unleashed by globalization, deregulation, and technological upheaval has kept a tight lid on compensation.

The traditional relationship between productivity improvements and higher wages has been severed. Productivity growth is the fundamental building block of better living standards. Wage growth and productivity growth usually move in tandem, but no longer. During the expansion of the 2000s, productivity jumped by 11% while median hourly compensation went nowhere.

This disconnect is potentially a big deal. The late management philosopher Peter Drucker once noted that for Karl Marx and other 19th century economists the only way to boost productivity was to work employees harder and longer. This perspective was behind his famous proclamation that workers faced a future of relative "immiseration," or impoverishment. That's why Drucker celebrated the rise of American engineers like Frederick Taylor and management gurus such as Alfred Sloan: They showed the economic and social promise of working smarter. Rising productivity now meant worker wages could go up and the price of goods and services could go down.

"Without Taylor, the number of industrial workers would still have grown fast, but they would have been Marx's exploited proletarians," Drucker wrote. "Instead, the larger the number of blue-collar workers who went into the plants, the more they became 'middle class' and 'bourgeois' in their incomes and their standards of living."

Today, it seems like we're back to the future.

Bleak Long-Term Outlook

Of course, America is a much wealthier society than three decades ago. Even after the trauma of the Great Recession, Americans own bigger homes, cars, televisions, and other things. Personal computers, the Internet, cell phones, and other telecommunication devices have transformed everyday life. And not everything was bought on a debt-financed mirage. We're wealthier because families boosted their incomes as women entered the workforce. In 1968, 38% of married women ages 25 to 54 with children worked out of the home. That figure is now more than 70%. Mom and Dad also work about 20% more hours than in 1968.

Yet the money push from the rise of two-income couples has leveled off. (Sorry, you can't send the kids off to work.) Families will be forced to live off wages that have reached a plateau.

The long-term earnings picture deteriorates for many of those that have been laid off. In essence, research shows that a large number never recover from the financial loss. For example, after the deep recession of the early 1980s it took four to five years for overall wages to recover. Columbia University economist Till Marco von Wachter examined the experience of workers that had stable jobs going into the recession and were let go during the downturn. He calculates that the short-term wage loss was about 30% in the year immediately after getting a pink slip while the average long-term loss was 15%. To be sure, while 25% of laid-off workers did bounce back to the same wage level or better, the remainder were worse off. "There's nothing to suggest that today will be very different," says Wachter.

There's the rub. Nothing on the horizon suggests that a majority of workers will take home a bigger slice of the economic pie anytime soon. The bleak wage outlook and growing financial insecurity isn't a passing phenomenon reflecting the downward momentum of a recession and the fragility of the recovery. It's understandable that most people are worried about the parlous state of the job market, yet it will recover with time. The same can't be said for worker wages and family incomes. And that outlook is a long-term threat to America's prosperity.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on BusinessWeek.com.

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