U.S. Wages Grow at Slowest Pace in 20 Years

The wages and benefits of American workers so far this year have risen at their slowest pace in almost two decades, clouding what had been some of the brightest news about the current boom--its recent success at improving the lots of a broad swath of working people.

The government said its employment cost index, Washington’s most reliable measure of what employers are paying in wages, salaries and benefits, rose a mere 0.4% in the first three months of the year.

That is barely half what had been expected and only half the pace at which it increased in the final three months of last year. And for the first time in at least two years, the latest wage and benefit gain was roughly canceled out by inflation.

Though Thursday’s report does not measure such increasingly important compensation as stock options, the small rise could add to pressure that some observers see building for bigger wage increases. The push for higher pay already has begun in some industries, most visibly airlines, in which unionized employees are demanding a bigger share of the wealth after their wage concessions of the early 1990s.

“I think we are right on the cusp of wage pressure,” said John Stanek, president of International Survey Research Corp., a Chicago company that plumbs employee attitudes.

But economists greeted the numbers with enthusiasm, calling it fresh evidence that inflation remains tame and noting it reduces the already slim chances the Federal Reserve would step in to slow the economy.

“It’s hard not to interpret this as unmitigatedly good news for the macro-economy and investment. It suggests we can grow much faster than we thought we could without sparking any inflation at all,” said William Cheney, chief economist of John Hancock Mutual Life Insurance Co. in Boston.

Though quarterly data can be volatile, the weak wage gains of the latest quarter suggest an abrupt change. Until this year, most workers’ economic condition has been improving because, while wage gains have been moderate, inflation has been even slower, which means that whatever gains people do garner are worth more than in the past.

Indeed, during the last three years, wage gains after inflation have been the best in more than two decades, according to government statistics.

“We are . . . seeing some very impressive real wage growth, which is a big change over what was happening earlier in the 1990s,” said Alan B. Krueger, a Princeton University labor economist.

Still, Krueger and others acknowledged they are perplexed by the new figures, given the tight labor market.

“They’re puzzling, and they may show some deceleration of wage and benefit gains,” said Jared Bernstein, an economist with the labor-backed Economic Policy Institute.

If so, and if workers begin to lose ground once again, there is plenty of sentiment for a more aggressive posture by labor. International Survey Research has recently found indications that workers feel they are being fleeced.

“There is a restiveness out there, and I think most employers don’t have any idea,” Stanek said.

Yet however workers might feel about their wages, there has been no slowdown in the consumer spending binge that has kept the nation’s economy booming. Consumer confidence has soared each month this year, and orders for durable goods remain robust.

Cash Bonuses, Stock Options Increase

The virtual absence of major upward pressure on wages has been one of the great surprises of the nine-year economic expansion. The tight labor market would normally send wages up sharply as employers competed for workers, and that in turn would fuel inflation.

The explanations, in addition to the persistent low inflation, include lingering job insecurity prompted by continued layoffs and the fact that more workers have realized gains through cash bonuses and stock options, most of which aren’t reflected in the usual measures of wages.

Thursday’s labor cost numbers “don’t give the full picture of what is happening to most workers’ paychecks,” Bernstein said.

But no less an authority than chief inflation-watcher Alan Greenspan, chairman of the Federal Reserve, has warned that chronically mild wage pressures will not last forever.

“Growth has continued to shrink the pool of workers willing to work but without jobs,” Greenspan told Congress recently. “While higher productivity has helped to keep labor cost increases in check, it cannot be expected to do so indefinitely in ever tighter labor markets.”

At Northwest Airlines, 6,200 pilots went on strike last September to land a four-year contract with a 12% overall raise, stock options, profit-sharing and the phasing-out of a two-tier pay scale. A job action at America West Airlines was narrowly averted in March with a tentative agreement by the Phoenix-based air carrier to pay $80 million more to its 2,300 flight attendants during the next five years, boosting salaries for its most senior flight attendants by as much as 47%, and paying daily expenses for the first time.

“The bottom line is wages stink,” said Deanna Clarkson, an America West flight attendant for nearly 14 years. Clarkson’s $21,000-a-year salary is near the top of the airline’s wage scale for flight attendants but well below comparable jobs at other carriers.

2.8 Million Jobs Created in 1998

The booming economy created 2.8 million jobs last year, and the rising demand for workers to fill them drove unemployment for the year down to 4.5%, the lowest annual rate in almost three decades.

Hourly wages for nonfarm workers increased a mere 3.5% in 1998, slightly more than in 1997. But inflation has been even more tame, rising 2% or less in 1997 and 1998.

Thanks to the boost in the federal minimum wage in 1996 and 1997, as well as low unemployment and nearly dormant inflation, workers have gained back almost all of the wage ground lost during the recession, economist Bernstein said.

“Real” wages--average hourly pay, adjusted for inflation--rose to $11.29 in 1998, nearly returning to the pre-recession wage of $11.35 in 1989.

But most employees don’t take the consumer price index into consideration when calculating how much they are making. Therefore, a small raise still feels small even though inflation is even smaller, said Matt Bloom, an assistant management professor at Notre Dame University who studies compensation systems in businesses.

“When you talk about raises of 4% or 5%, people think it’s a cost-of-living adjustment” even if inflation was only 2%, he said.

Employers this year are expecting to grant raises of about 4.2% overall to management and professional employees and about 4% to nonexempt and nonunion hourly employees, according to a survey by the William M. Mercer Inc. consulting firm.

Those figures have changed little during the last three or four years, the company said. And one of the reasons for that is employee insecurity, which dates to the layoffs of the early 1990s.

A sampling of employee attitudes by International Survey Research recently found that 37% are frequently concerned about being laid off. That compares with only 12% in 1981.

“I think we’ve got a generation that is fairly well traumatized by the early events of this decade,” Stanek said.

Greenspan has also cited greater resistance by employers. He told Congress in February that low inflation is perpetuating itself by making it difficult for businesses to raise prices for fear that the competition won’t follow.

“Given the loss of pricing power, it is not surprising that individual employers resist pay increases,” Greenspan said.

The greatest real wage progress has occurred since 1996, which economists credit in particular to productivity gains made possible by technology. If workers are producing more per hour, then employers can raise wages without raising prices.

Meanwhile, the cost-cutting mania that developed among corporations during the last recession has led to a fundamental shift in how compensation is determined. More pay is going into cash bonuses and other incentives such as stock options and profit-sharing, said Steven Gross, a Philadelphia-based compensation expert with William M. Mercer Inc.

The use of incentives also makes it easier for corporations to cut compensation when times turn sour. Said Gross, “It’s hard to cut people’s base pay. It’s easier to let bonuses evaporate.”

Survey Finds Growing Dissatisfaction

But despite bonuses and the real wage gains of the last two years, workers are beginning to clamor for larger base pay increases. And that will likely intensify if the sluggish first-quarter pace of wage gains continues.

International Survey Research uncovered growing dissatisfaction with pay in its latest survey. Only 43% of employees surveyed in 1998 felt that their pay was as good or better than the pay in other organizations, compared with 47% in 1997. Forty-one percent of employees said they felt “very much underpaid” for the work they do, compared with 38% in 1997.

The outlook for wages is “changing dramatically as we speak,” said Marc J. Wallace Jr., a Chicago management consultant.

“I wouldn’t be surprised to see average wage increases of 6% to 7% next year from the 3% to 4% of this year,” Wallace said.