4 Reasons that Pay Raises Are so Low

Why are pay raises so paltry? Joseph LaVorgna, chief economist for the Americas at investment firm Natixis, has a roster of reasons—and none are about to change anytime soon.

No question, average hourly earnings growth is not breaking any records in this economic cycle. Yes, it has risen to an annual 2.7% lately from 1.5% in 2012. But that’s down from 4.3% in late 2007, and pathetic compared to the high single digits during the 1990s.

That’s not the worst of it. When you factor in inflation, workers aren’t getting ahead. Subtract the 2.7% average raise from the current headline consumer price index increase (that’s where you keep in food and energy costs) of 2.9%, and that worker has lost 0.2 percentage points.

Willis Towers Watson’s employer survey finds that average pay hikes this year will be 3.1%. So if inflation stays the same, our worker will end up this year with a measly 0.2-point gain.

Federal Reserve economists have expressed puzzlement over why raises are so darn chintzy, especially with the jobless rate so low, at 3.9%. Such a level ordinarily would mean employers are competing for workers by throwing money at them. That’s not happening.

To economist LaVorgna, writing in a research note, the culprits are:

Poor productivity growth. Up around 1.1% yearly in this expansion, this makes it hard for employers to pump up their payrolls because output-per-worker is barely budging. The last time the US had strong productivity growth was in the late 1990s.

Worker insecurity due to technological innovation. No stats exist to prove this, but LaVorgna noted the so-called quits rate was “noticeably below” that of 2001, when the unemployment rate was similarly low. In other words, people are clinging to the relative security of the job they know, rather than taking a chance to go someplace where a robot might render them obsolete.

Industry concentration. This phenomenon, known as monopsony, diminishes the labor market. “Without more firms to turn to, workers have limited ability to press for higher pay,” LaVorgna observed.

Rapidly aging population. In other words, highly skilled baby boomers are retiring and the younger replacements lack the knowhow, plus they command lower pay.

If any good news exists, it’s the decline in labor slack. That is, the most comprehensive measure of unemployment, called U-6—which covers discouraged workers and part-timers wanting full-time positions. It dipped to 7.5% in July, from 10% in 2016.

LaVorgna thinks U-6’s fall might eventually spur meaningful pay raises. But the other forces he cites are powerful obstacles, alas.