U.S. workers have finally been seeing some decent raises in recent months, after suffering through nearly a decade of meager wage gains. Unfortunately for them, this might be as good as it gets.
The behavior of wages has long been a central mystery of the U.S. labor market. Even as employers kept hiring and the unemployment rate fell to multidecade lows, the demand for workers failed to translate into higher pay. For most of the period starting in 2010 and ending in 2013, wage growth hovered below 2%.
Lately, though, things have started to move. Year-over-year growth in average hourly earnings reached 3.4% in February, roughly matching the pace that prevailed ahead of the last recession, before retreating a bit to 3.2% in March.
In terms of actual dollars, average weekly pay now ranges from a low of $357 for those in leisure and hospitality and $500 for retail workers up to $1,553 for utility employees, $1,366 for miners and loggers, and $1,013 for finance workers on the high end.
Could wages accelerate further? It wouldn’t be unreasonable to expect some payback after all those years of relative stagnation. Yet considering one of the most important contributors to wage growth — workers’ productivity — it doesn’t seem likely to be all that big.
In the longer run, two factors determine how much employers can and should pay. One is inflation: Wages must keep pace with prices lest workers end up worse off. The other is productivity: The more employees produce each hour, the more companies can afford to pay them.
The sum of the two — inflation plus productivity growth — sets a sort of limit on how fast pay can increase without causing economic problems.
So what’s the limit? As of December, the Federal Reserve’s preferred measure of inflation, at 1.95%, was very close to the central bank’s target of 2%. It could go a little higher, but a lot would be undesirable and attract a justified response from the Fed.
Meanwhile, productivity growth remained pretty slow, up just 1.77% from a year earlier. Altogether, that adds up to about 3.7% — a low ceiling that wage growth was already close to hitting.
In other words, greater gains in workers’ living standards will require faster productivity growth. To some extent, higher wages might provide a boost of their own. Beyond that, though, it’s hard to see where the growth will come from.
Corporate tax cuts haven’t resulted in the kind of investment that could drive a breakthrough. President Trump hasn’t followed through on promises of infrastructure spending — which, done right, could make the whole economy work better. And his immigration policies have not been conducive to bringing in highly skilled foreigners.
That leaves workers to hope for a miracle. It could happen, but don’t count on it.
Mark Whitehouse writes a column for Bloomberg.