08 November 2014

Wage Stagnation's Simple Cause

Household income is about where it was 20 years ago. This is attributed to slow wage growth. But wage growth may - in turn - just be a function of job creation.

In this graph, the blue line traces inflation-adjusted household wages. The red line is actually plotted upside down. When it falls, the number of discouraged workers goes up. When it rises, their numbers go down. It essentially tracks the conditions of labor markets.

From 1993 to 1999, wages rose 15%. During that same time, the American economy created 21.2 million jobs. From 1999 to 2004, the economy lost 192,000 jobs and wages fell 4%. From 2004 to 2007, the economy gained 6.6 million jobs and wages rose 3%. From 2007 to 2011, the economy shed 6.5 million jobs and wages dropped 8%.

It's not a hard equation. As demand for workers rises, their wages go up. When demand falls, so do their wages.

As we create jobs, wages should become less of an issue. Better education, stronger unions, and higher minimum wages will all help wages to grow but none of these matters as much as simple supply and demand in labor markets.

1 comment:

damon said...

its too bad we are so impatient in waiting for the simple economic reality that we feel forced to legislate wages higher, which rarely is corrected when the economics change. What this 'theoretically' could end up doing is not allowing the same economic principle to swing the opposite direction in its natural course, perhaps leading to overpaid workers.