December 16, 2018
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The surprisingly high number of Americans getting absolutely no raises

Jason Getz | MCT
Jason Getz | MCT
Roughly 14 percent of workers, or 1 in 7, have seen their earnings stall over the past year, counting only those who have stayed in the same job.

One of the great puzzles of this economic expansion has been the tepid increase in wages, even as the unemployment rate has declined to 3.7 percent, its lowest point since 1969.

But drill down, and there’s an even deeper issue. A surprising number of workers aren’t seeing any wage growth at all. Their pay this year is exactly the same as it was last year, right down to the dollar.

Roughly 14 percent of workers, or 1 in 7, have seen their earnings stall over the past year, counting only those who have stayed in the same job. That’s only a slight improvement over the 16 percent rate reached in the hangover years after the Great Recession.

For comparison, the last time the United States had an unemployment rate under 4 percent, in the go-go dot-com years, the number of workers getting $0 raises fell below 10 percent, according to an analysis of Labor Department data from former Treasury Department economist Ernie Tedeschi.

And note that the plight of these workers with frozen wages looks even worse once you account for inflation. The cost of living goes up a little bit every year, which means that same $70,000 salary is worth less in 2018 than it was in 2017.

Over time, you’d expect to see a symmetric up-and-down pattern in the number of workers without raises, driven by a well-known phenomenon called sticky wages. It works like this: Even when the economy is bad, employers are reluctant to cut pay, for fear of lowering morale and productivity. So workers lucky enough to avoid a layoff instead find their salaries frozen in place. Then, as the economy improves, regular raises return.

Except this time — nine years into what is currently the second-longest recovery in U.S. history — this unusually large number of workers is still stuck with frozen paychecks. The question is: Why?

To begin with, lots of workers would seem to have sound biweekly reason to feel that they are being left behind. Despite the strong GDP growth of recent quarters, and the multiyear run-up in corporate profits, their pay is not advancing at all.

One reason employers may be foregoing annual raises is that no one is forcing their hand. Not only has the decline of private-sector unions deprived blue-collar workers of their former bargaining power, but in a world where industries are increasingly dominated by just a handful of companies, it’s harder for workers to pit potential employers against one another in bidding wars.

Another possibility is that business leaders may still be scarred by memories of the Great Recession. In those years, “sticky wages” kept them from cutting salaries — lest they hurt morale. But the result was higher labor costs at a time of collapsing profits and tight budgets.

Now, with the next recession waiting out there in the uncertain future, businesses may be wary of finding themselves stuck in the same position, having committed to pay increases they can’t lightly take away.

Finally, though, the prevalence of raise-less workers in our fairly strong economy may point to an underappreciated problem with the Federal Reserve’s 2 percent inflation target. When inflation is running at 4 or 5 percent, the price changes are more visible, which makes salary increases seem more urgent and less optional. These days, with inflation near 2 percent, it’s easier to forget that prices are changing at all, which may induce more complacency among workers and businesses when it comes to regular pay adjustments.

Of course, it’s still possible that we are on the cusp of a change, and that 2019 will be the year that nearly all workers see their paychecks swell. But if that’s the trajectory, it’s certainly well hidden.

If anything, the real risk may run in the other direction. Research from the Kansas City Fed has found that when a large share of workers get passed over for raises, wage growth for all workers tends to remain slow in the year ahead.

 


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