The Mystery of the Vanishing Pay Raise

AMID the global economic turmoil and seesawing markets, millions of Americans have one overriding question: When will my pay increase arrive? The nation’s unemployment rate has fallen substantially since the end of the Great Recession, sliding to 5.1 percent from 10 percent in 2009, but wages haven’t accelerated upward, as many had expected.

In fact, the labor market is a lot softer than a 5.1 percent jobless rate would indicate. For one thing, the percentage of Americans who are working has fallen considerably since the recession began. This disappearance of several million workers — as labor force dropouts they are not factored into the jobless rate — has meant continued labor market weakness, which goes far to explain why wage increases remain so elusive. End of story, many economists say.

But work force experts assert that economists ignore many other factors that help explain America’s stubborn wage stagnation. Outsourcing, offshoring and imports exert a steady downward tug on wages. Labor unions have lost considerable muscle. Many employers have embraced pay-for-performance policies that often mean nice bonuses for the few instead of across-the-board raises for the many.

Peter Cappelli, a professor at the Wharton School of Business, noted, for instance, that many retailers give managers bonuses based on whether they keep their labor budgets below a designated ceiling. “They’re punished to the extent they go over those budgets,” Professor Cappelli said. “If you’re a local manager and you’re thinking, ‘Should we bump up wages,’ it could really hit your bonus. Companies have done this in order to increase the incentive to hang tough on budgets, and it works.”

In recent years, wage increases, before factoring in inflation, have averaged about 2 percent annually. But real, after-inflation wages have remained dismayingly flat since 2009, according to the Bureau of Labor Statistics, even though real wages did bump up last fall when the drop in oil prices pulled down inflation. (In a minority view, the Heritage Foundation and some other conservative groups say the bureau has underestimated wage increases.)

Many economists don’t expect real wages to pick up until the job market tightens further. Federal Reserve officials hoped wages would begin rising at today’s 5.1 percent, but economists are increasingly saying the rate might need to fall to 4.9 percent or lower to push wages higher (although some fear that inflation will climb if the jobless rate is that low). The only time in the past four decades when after-inflation wages bounded upward was from 1998 to 2001, when the jobless rate fell below 4.5 percent.

Even as business executives urge the Federal Reserve to raise interest rates to prevent inflation, a move that might increase unemployment, Janet L. Yellen, the Fed’s chairwoman, says she might want to let the jobless rate fall below 5 percent. The reason: Only then might hundreds of thousands of discouraged workers or the long-term unemployed finally find jobs.

Lawrence Mishel, president of the Economic Policy Institute, a progressive research group, voiced frustration that while wages regularly rose faster than inflation in the 1950s and ’60s, that’s no longer the case. “Why is there this assumption that wages are only going to rise faster than inflation at very low unemployment?” he asked. “Where does that come from?”

Ever since the Great Recession battered corporate revenues and profits, many companies have been far tougher in containing fixed costs, including labor expenses. “With the stock market’s wild behavior and what we’ve seen in China, companies continue to hold on to huge amounts of cash and are reluctant to increase their costs in the form of increasing wages,” said Kerry Chou, a senior practice specialist at WorldatWork, a nonprofit human resources association.

Jared Bernstein, a former chief economist for Vice President Joseph R. Biden Jr., put it another way: “There’s this pervasive norm” among employers “that labor costs must be held down at all costs because maximizing profits is the be-all and end-all.”

He added that the “atomization” of the American workplace — with the use of more temps, subcontractors, part-timers and on-call workers — had reduced companies’ costs and workers’ bargaining power.

As a result of all these trends, the share of corporate income going to workers has sunk to its lowest level since 1951. The Economic Policy Institute found that the decline in labor’s share of corporate income since 2000 costs workers $535 billion annually, or $3,770 per worker.

“The labor share has declined more than you would think in light of the tightening of the labor market,” said Lawrence Katz, a Harvard labor economist. “It suggests we’re seeing a decline in worker bargaining power.”

Another important trend depressing pay is that more than ever, companies are paying top dollar to star performers — whether marketing wizards or software programmers — while skimping on paying the many workers without special skills.

“Right now the labor market is good if you’re a new graduate of Harvard or Stanford in computer science or a new economics Ph.D. or if you’re coming out with a specialized skill in some health occupation,” Professor Katz said. “The upper 10 percent are probably doing O.K. in the labor market, but typical workers are still facing a lot of difficulties.”

As part of this embrace of pay for performance, many companies are giving raises or one-time bonuses only to their best performers, thus helping retain and attract top talent while subtly showing the door to less stellar workers.

“The higher performers are attracted to and will stay with organizations that differentiate higher performers,” said Ken Abosch, North American compensation practice leader for Aon Hewitt, a consulting firm. “Low performers are uncomfortable working in environments that emphasize higher performance so they will sort themselves out.”

In a study of 1,200 American companies, Aon Hewitt found that 25 percent overwhelmingly emphasize rewards to high performers and give far less or nothing in raises or bonuses to average or poor performers. “Those 25 percent say, ‘We’re going to give 6 percent to the top performers, 1.5 percent to average performers and we’re not going to give anything to below average,’ ” Mr. Abosch said.

Just 10 percent of companies give equal raises spread across the board, Mr. Abosch said. And the remaining companies do something in between — giving somewhat higher raises to top performers and somewhat less to everybody else.

Notwithstanding the overall decline in worker leverage, labor efforts like the Fight for 15 and Our Walmart have succeeded in pushing employers to lift some wages. McDonald’s has raised wages at its company-owned restaurants, and Walmart and Target will increase minimum pay to $10 an hour in February. Seattle, San Francisco and Los Angeles have adopted a $15 minimum wage, while Gov. Andrew M. Cuomo has ordered a $15 minimum wage for New York’s fast-food workers.

Such efforts offer hope to those who are eager to lift wages for everyone. “If you increase the bargaining power of workers, they might say, ‘No, we don’t want you just to give more pay just to the top layer,’ ” said Linda Barrington, executive director of the Institute for Compensation Studies at Cornell University. “We want you to share the rewards more evenly.”

The Mystery of the Vanishing Pay Raise