Employment, Not Wage Growth, Is the Problem

Employment, Not Wage Growth, Is the Problem

It is a widely accepted fact that wages have stagnated. Since 2010, average wages have increased at an annual rate of about 2 percent, barely keeping pace with inflation. This stagnation has led many liberal economists to point to declining union membership or lack of minimum wage increases. The stagnation of average wages, however, says little about the wages of individual workers.

Suppose that each new 20-year-old worker gets on a wage escalator with initial earnings equal to $15,000. On the wage escalator, all workers are continuously employed, receive a wage increase of $1,000 annually, and retire at age 70 making $65,000. If there are an equal number of workers at each age, the average wage for all workers will be $45,000 — which is also the average wage of each worker over his or her lifetime. When all of this is held constant, any changes to the average wage reflect changes to the well-being of individual workers too.

But in reality, all is not held constant. In recent years, Baby Boomers have been retiring, while many younger workers are finally finding full-time jobs as the recovery takes hold. This drags the average wage down.

A San Francisco Federal Reserve Board publication verifies this image of the labor market. It finds that over the past few years, for those who were continuously in full-time employment, wages grew annually by about 3.5 percent. The actual 2 percent overall annual wage growth results from the inclusion of transitional workers, as retired high-waged Baby Boomers were replaced by lower-waged younger workers.

The main problem is that not enough young workers are getting on the wage escalator. The share of youth who at some point during 2014 were neither at work nor in school was quite high: 13.5 and 14.2 percent among young women and men, respectively. Among young black women and men, it was 18.4 and 24.8 percent, respectively.

What may be most troubling, however, is how many youth are long-term disconnected: They neither held a job nor attended school in the last twelve months. In 2014, these long-term disconnected constituted 6.1 percent of 17- to 24-year-olds, up from 3.9 percent in 2000.

For disconnected youth, employment, not wage growth, is the major problem. Many youth from disadvantage backgrounds historically found their way onto the wage escalator by beginning with teen employment — jobs that gave them the necessary soft skills of time management and interacting effectively with their managers and fellow workers. Unfortunately, teen employment has collapsed, leaving many youth with much more limited access to the wage escalator.

The second problem is that male workers are getting off the wage escalator before their working careers should end. Among men 25-54 years old, between 2004 and 2014, the labor force participation rate declined from 90.5 to 88.2 percent. This decline is reflected in the growing share of men claiming an inability to work, especially in Rust Belt states. Between 2000 and 2012, the share of men 21 to 64 years old claiming an inability to work increased from 7.9 to 8.8 percent nationally. In Michigan it increased from 8.9 to 11.5 percent, and in Ohio from 9.2 to 12.2 percent. By contrast, in Texas, where job growth is high, it declined from 7.1 to 6.9 percent.

The growth of long-term disconnected youth and prime working-aged men is also reflected in unemployment statistics. In 1999, only 12.3 percent of those unemployed were without a job for more than six months. This long-term unemployment grew to 17.6 percent in 2007. In 2015, despite an overall unemployment rate which was comparable to those of 2007 and 1999, long-term unemployment was 28.1 percent of total unemployment.

Increasing union membership and the minimum wage might be beneficial for those already on the wage escalator. However, these policies do not solve the employment problems disconnected youth and displaced prime working-aged men are experiencing. Moreover, their inability to obtain and maintain employment is not only disruptive to their lives but also to their partners and children. Public policy must target the employment problems faced by these two groups rather than focusing primarily on providing improved benefits for those already on the wage escalator.

Robert Cherry is a professor at Brooklyn College.

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