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How Wage Stagnation Contributes to a Lackluster National Economy

by | Oct 13, 2016 | Economy, Jobs & Wages

Wage stagnation—a major contributor to income inequality in the U.S.—is a particular problem for workers at the middle and lower end of the wage scale. While the wages of workers in high-wage jobs has continued to grow in recent decades, the wages of low- and moderate-wage workers have been stagnant, and have actually declined since the beginning of the Great Recession. This phenomenon goes a long way toward explaining the economic doldrums that have impacted the national economy in recent decades. Furthermore, both the trend of wage stagnation and lackluster economic performance coincide with the decline of union membership and the ability of workers to collectively bargain for better wages and benefits.

A comparison of worker compensation and worker productivity in the post-World War II era illustrates the extent of wage stagnation in recent decades. From 1948 to 1973, the wages and benefits of U.S. workers kept pace with growth in worker productivity, as each one percent increase in productivity coincided with a 0.95 percent increase in hourly compensation. However, beginning in approximately 1973, the two trends diverged; in the four decades from 1973 to 2013, productivity continued to grow at a pace approximately equal to that of the preceding quarter century; however, during this period each one percent increase in productivity was accompanied by just a 0.13 percent increase in compensation. (These trends are illustrated nicely in figure 2 in a 2015 Economic Policy Institute report.)

The leveling off of compensation vis-à-vis productivity did not impact all classes of workers equally. Higher wage workers continued to enjoy robust wage growth in recent decades, while other workers were not so fortunate. The following EPI chart shows the cumulative change real hourly wages of workers by wage percentile from 1979 to 2013 based on Current Population Survey data.

wage2b

From 1979 to 2013, wage growth for “very high wage” workers (defined as those at the 95th percentile) increased by 40.6 percent. Additional EPI analysis of Social Security wage statistics shows that wage earners in the top one percent experienced wage growth of 137.7 percent over this period. Meanwhile, “middle wage” workers (those at the 50th percentile) saw wage growth of just 6.1 percent and “low wage” workers (those at the tenth percentile) experienced a decline of 5.3 percent. Since 2007—the year prior to the onset of Great Recession—through 2013, the wages of “middle wage” and “low wage” workers have fallen by 1.6 percent and 4.3 percent, respectively, while wages of “very high wage” workers have increased by 3.3 percent.

With the linkage between worker productivity and worker wages severed, the wages of many workers stagnated and in some cases declined. The workers most adversely impacted were those in the middle and at the lower end of the income scale. Because wages comprise the majority of the income of these households and because these households comprise the vast majority of consumers, demand for goods and services inevitably suffered, contributing to less employment and even lower wages. A vicious cycle ensued, as described in a recent North Star article. The ultimate result has been severe recessions punctuated by anemic recoveries.

The charts above were prepared in 2015 and thus do not reflect the wage increases from 2014 to 2015 observed in recent data releases from the Census Bureau. While these recent wage increases are encouraging, they are not sufficient to offset the longer term trend of stagnant and declining wages.

The stagnation of wages in the U.S. has coincided with the decline in union membership. In the 1950s, about one in three workers were union members. Union membership had fallen to one four by the mid-1970s, to about one in five by 1983, and to just over one in ten in 2015. The chart below (based on a compilation of Current Population Survey data and other information from the U.S. Bureau of Labor Statistics) shows the decline in union membership since 1983 for the entire U.S. and for Minnesota.

union

Minnesota’s rate of union membership is greater than the national average; in 2015, 14.3 percent of Minnesota workers were union members—the 11th highest among the fifty states and 3.2 percent above the national average (11.1 percent); however, in terms of the rate of decline in union membership over time, Minnesota is typical of the rest of the nation.

The fact that wages stagnated at the same time that union membership was falling is no coincidence. The role of unions in ending the long trend of stagnant and declining wages for low- and moderate-wage workers will be examined in the next installment in this series.

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