Why wage growth is like a traffic jam

With low unemployment shouldn’t wages be rising?

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We’re still not back to 2007 wage levels, 10 years later

We’re stuck in an infinite loop of low wage growth, even when unemployment is at historic lows. What’s the problem? Daniel Gross thinks businesses and workers have forgotten how supply and demand for labor is supposed to work:

Why Can’t Americans Get a Raise? | Daniel Gross

We live in an age of long business cycles and rare and shallow stumbles: In the 25 years between November 1982 and December 2007, there were only two recessions, each of which lasted just eight months. But the 18-month recession of 2008 to 2009, and the remarkably destructive debt crisis that fell in the middle, led to near-death experiences for many companies (and real-death experiences for large chunks of the banking and auto industries).

Corporate America went into survival mode and took an axe to what, in most instances, was its largest single cost: labor. Between January 2008 and February 2010, private-sector companies slashed 8.8 million jobs. At the same time, they slashed the wages and benefits of the workers they continued to employ. This was the playbook for getting through the worst financial downturn since the Great Depression. And as the economy began to expand, companies remained parsimonious on wages and benefits, and continued to push the obligation and cost of training onto workers.

Companies are psychologically and emotionally geared not to raise wages as a matter of course.

They were able to do that in part because there was immense slack in the labor market. The unemployment rate peaked at 10.0 percent in October 2009. And so for a long period of time, companies became accustomed to getting all the labor they needed at the (low) price they wanted to pay, and managed to hold onto staff despite not raising wages. This mentality hardened into something like a permanent mindset, incorporated into business models and pro forma projections. In an era when overall economic growth was slowing, companies simply couldn’t countenance raising wages consistently.

Businesses encountered surprisingly weak countervailing forces. Only 6.4 percent of private-sector workers are represented by unions who can bargain on their behalf, and many of those unions are in a permanent defensive crouch. While several states raised the minimum wage, the federal wage floor remained stuck at $7.25.

At the same time, a similar scarring was happening on the other side to workers at every skill level, in every profession, at every rung of the income ladder. Given the weak safety net and low level of savings, the massive job losses and long-term unemployment suffered in 2007–2009 were devastating. Foreclosures and bankruptcy filings spiked.

In the wake of these losses, the mindset changed. What became paramount to the traumatized is simply to have a job with a steady paycheck, and to worry less about wages and the potential for raises. Someone out of work for a year — and who had difficulty making mortgage payments as a result — is more likely to take the first job he could get, try to hold on to it for dear life, and accept poorer wages because the alternative to not having the job is difficult to imagine. Seven years after the recession, Americans are quitting jobs at a relatively low rate despite the apparent abundance of positions. Out of fear or abundance of caution, they are sticking it out where they are, even if the pay is worse.

This amounts to a mutually reinforcing feedback loop. Companies are psychologically and emotionally geared not to raise wages as a matter of course. And many people who work are reluctant to aggressively ask for higher wages, or to quit and seek a better opportunity.

But this has got to give at some point. Once some group of employers raise wages and attract the best workers, the blockage in the system may clear. But it could take a while to work through the economy, like a traffic jam that takes half a day to clear even though the broken-down truck that caused it was towed away two hours ago.

Originally published at stoweboyd.com.

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