Why US wages are stagnating

Behind the failure of US inflation to rise is the fact that wages have stagnated. Many of the reasons also apply to Australia.

A plant in Wilcox County, Alabama, one of the poorest areas in the US. Employees at the plant formed a union to bargain for higher wages. Pic: WSJ

Concern in the US Federal Reserve about the failure of inflation to accelerate with higher US growth this week stalled the rise in US bond yields.

And in turn that will influence world interest rates.

At the core of the failure of American inflation to rise is the fact that US wages have stagnated.

The so-called “ Hamilton Project”--- a group of economists and commentators — has isolated fascinating reasons for the lack of US wage growth. And many of the reasons also apply to Australia as well as being forces used by Donald Trump to become US president.

The portion of national income received by US workers fell from 64.5 per cent in 1974 to 56.8 per cent in the second quarter of 2017.

Over the past few years the US labour share has ceased falling, but that reflects the ongoing economic recovery rather than any change in the long-run downward trend.

One reason for the fall in the labour share is the rise of so-called “superstar” firms, which are likely to have lower labour shares given their high profitability. In addition, market concentration has increased noticeably over time and appears to be playing a role in lowering labour’s income share.

Much of the growth in wages has been concentrated at the top, with wages in the top quintile rising from $US38 per hour in 1979 to $US48 per hour in 2016 — a 27 per cent increase. Wages in the upper-middle quintile increased by 12 per cent, from $US24 per hour to $US27 per hour. In the bottom fifth, real wages fell slightly over the same period.

The increased demand for educated workers explains much of the rise in wages for workers in the upper part of the wage distribution, while the decline in union membership depressed wages in lower levels.

In 1956 about 28 per cent of all workers belonged to a union; in 2016 that number was a little more than 10 per cent. This decline has occurred principally among private sector workers, where now only 5 per cent belong to a union.

The spread of other labour market institutions — such as noncompeting contracts, and no-poaching and collusion agreements by firms — could also be contributing to weaker worker bargaining power.

The decline in the real minimum wage has limited wage growth among low-wage workers.

Among large companies there is an across-the-board rise in inequality but in smaller firms wage inequality changes with industry, not income levels. Unfortunately the rate of small company start-ups has decreased, boosting inequality.

And wage stagnation is more a problem for men than women. Female wages have risen and men’s have fallen.

President Trump isolated the trade deals that lead to the United States importing more manufactured goods today than in prior decades. This played a role in increasing the share of imports from low-wage countries.

Globalisation has conferred a number of benefits for workers including lowering consumer prices, so helping increase real wages. In addition, exports can be an important source of productivity and wage growth. However, US imports are more likely than US exports to be produced by low-skilled workers. Accordingly trade may put downward pressure on wage growth for low-skilled American workers.

Making things worse, US workers are now less likely to be mobile and shift to areas where there is work.

There are no doubt these factors keep US interest rates low. They are not easy to reverse although recently, increases in US state minimum wages appear to be raising wages at the bottom end of the wage distribution.