- The Washington Times - Thursday, June 7, 2012

Presidential candidates like to say it’s all about jobs, but for the nearly 92 percent of the American workforce with jobs, it’s about the wages.

U.S. corporations are brimming with cash and reporting record levels of profits, but many workers haven’t received solid raises in years. Some have had to take on the workloads of laid-off colleagues, but have not received additional pay. The jobs that are open often provide smaller paychecks than the ones Americans lost during the 2007-09 recession.

Compensation for workers has been inching up at less than 2 percent a year — about half the pre-recession rate — despite three years of recovery, government reports show, and average hourly wage gains have hit a record low of 1.4 percent.

This dearth of solid income growth is having a broad impact on the economy in obvious and subtle ways.

It is a key reason for the subpar recovery because it denies American consumers — the biggest engine of economic growth — the wherewithal to increase spending in any sustained way.

Consumers have had to depend on a series of federal tax cuts to eke out even the modest gains in spending since the recession ended in June 2009. Americans also are more vulnerable to even a small uptick in inflation, which can easily overwhelm their growth in wages.

On a psychological level, flat wages dampen consumer spirits — making many people feel like the recession never ended — and feed anger about any outsized gains in prices for essentials — such as a spike in gasoline prices — that erodes any increase in spending power.

Suzanne N., a California technology worker who asked for privacy reasons not to reveal her last name, knows the story well. She took a job with a startup firm seven years ago and began to get good raises. But during the recession, the company encountered difficulties and announced a 10 percent pay cut.

Although the pay cut was made up two years later when business improved and she got a small raise at that time as well, she has heard nothing about raises since. With expenses rising — particularly for gas — Suzanne recently inquired about a raise and was told she would have to wait.

“Many friends say, ‘Be happy you have a job.’ Some individuals have not had raises in over four years,” she said, noting that one friend recently had to take a two-week unpaid furlough. Still, “my motivation to do a job well is slacking” without any hopes of getting a raise, she said.

Suzanne’s employer has compensated her for the long period without raises by giving her considerable job flexibility. She works from home four days a week, which allows her to spend more time with her family and helps save fuel on her 168-mile round-trip commute.

She also was given 1,000 shares of company stock, which currently do not have much value, she said, but she expects they will someday.

“All in all, I could not imagine working someplace else,” she said. “But there is that one little piece of me that keeps saying if you’re such a good employee — and I’m told this often — then why doesn’t my paycheck show it?”

Pay, profits diverge

Pay cuts, freezes and interruptions in pay, common during the recession, remain fixtures in the job market despite the reviving profitability of U.S. companies.

Corporate profits recently rose to their pre-recession peak level of 8.3 percent of the economy’s total output, and corporations are sitting on an estimated $2 trillion in excess cash. But wages have barely budged from recessionary growth rates that are less than half the 4 percent gains seen in the expansion of the 2000s.

Although wages are usually slow to recover after a recession, the stark divergence of profits and wages three years after the start of the recovery is unusual for the U.S., economists say.

After deducting expenses from income, companies traditionally have devoted a larger share of what is left — their profits — to workers and a smaller share to shareholders. That’s why analysts expected to see wages go up when profits rebounded to record levels after the recession.

“This is the slowest rate of growth in more than 45 years” for rank-and-file workers, whose hourly wages rose 1.4 percent in the past year, said Keith Hall, senior research fellow at George Mason University. “Wage growth lags well behind inflation, which means a decrease in purchasing power. This is bad news for our much-needed economic growth.”

Even looking at a broader measure of U.S. income, which encompasses the corporate elite and includes income from stock options and bonuses, the picture looks dim.

“Normally, at this point in the business cycle, personal incomes from wages and salaries, as well as personal spending, are growing between 5 percent and 7 percent per year,” said John Canally, an economist at LPL Financial.

Not so this time.

“Personal income — which is derived by adding up all the paychecks earned by all workers throughout the economy — is up by less than 4 percent from a year ago,” he said. No wonder “consumers are struggling.”

Economists attribute the stuck wages mostly to the 8.2 percent unemployment rate. On average across the nation, about three unemployed workers are competing for every job that opens. Moreover, millions of people are underemployed, working part-time or temporary jobs, and are eager to snap up full-time jobs that come available at nearly any wage.

A study by the International Monetary Fund found that the share of national income going into labor in the United States has continued to decline since the recession and has dropped overall by 2 percent since 2008.

The only advanced economies with worse erosions in wages are Greece and Spain. These European countries are experiencing deep recessions with unemployment rates of more than 20 percent as a result of governmental debt crises, the IMF found.

“The recent recovery in the United States appears unusual from a historical perspective,” IMF researcher Florence Jaumotte said, suggesting that “workers’ fear of long-term unemployment has led to more subdued wages.”

Left out of the recovery?

Ms. Jaumotte noted that workers’ share of national income has been on the decline in the U.S. for years and that the drop has accelerated as a result of the recession. Since 2000, workers’ share of income has fallen from nearly 64 percent to about 58 percent.

“Did workers shoulder a larger share of the adjustment during the Great Recession?” she asked. “Have they been left out during the recovery?”

The downward trend in wages is feeding inequality and a polarization between the highest- and lowest-earning workers like nothing else seen in the United States since the Gilded Age of the late 19th century, according to the IMF.

That is because people at the top who manage the corporations and those with the greatest skills and education — particularly the top 1 percent of earners — have been able to maintain and even raise their share of income while most everyone else’s was dwindling.

Government figures show that nearly 60 percent of all income growth since 1989, or nearly $1 trillion, has been accrued by the top 1 percent of U.S. earners.

The highest-paid workers also have benefited the most from the recent increase in corporate profits — which usually are passed on to shareholders through increased earnings and dividends and company stock buybacks funded by growing mountains of corporate cash.

While wage gains have been limping in the past two years, income from dividends soared at double-digit rates of 20 percent in 2010 and 10.3 percent in 2011, according to the Commerce Department.

Russ Koesterich, global chief investment strategist at iShares, said the result has been satisfying from an investor’s point of view. Workers who have pension plans invested in stocks have shared in some of the gains.

“U.S. corporations have remained remarkably resilient and unusually profitable, with historically high margins despite anemic growth,” he said, attributing the boom to today’s remarkably tame wage growth and low interest rates.

“The corporate sector deserves some kudos for its discipline and adaptability,” he said, but he expects that when economic growth picks up, wages eventually will start to grow more normally again.

New jobs pay less

Corporations have kept a lid on wage costs by withholding raises and by replacing laid-off workers with people who accept lower pay.

Tom Porcelli, chief U.S. economist at RBC Capital Markets, noted that the average wage at jobs created since the recession has been 8 percent lower than the wages of workers who were laid off.

“This shift represents an 8 percent wage cut for the 3.7 million people that have been hired since the downturn ended,” he said.

While the job market has been slowly improving, with millions more jobs created and lower unemployment in the past three years, “the sheer number of job gains is not the only variable that matters,” he said. “Wages are the critical source of ammunition from a spending perspective.”

In one recent example, Caterpillar Inc., which manufactures heavy equipment, told workers at a locomotive factory that they would have to accept a pay cut of 50 percent or the company would move the jobs to factories where workers made much less — $12 an hour. That move shocked the workers.

“With bills to pay, workers wouldn’t be able to live taking a 50 percent pay cut without a drastic change in life,” said Ray Joseph Cormier, comparing the decision to the austerity imposed on workers in Greece. “Global corporations have workers either afraid of losing their jobs or those without one willing to do almost anything cheaper.”

The pressure on wages has fueled public resentment and fear. The brunt often has been borne by government workers, who represent about the only segment of the labor force anymore who receive regular pay raises and cost-of-living adjustments, usually negotiated as part of union contracts.

“What have they done to deserve it?” Scott M. Manson, a D.C. contractor and businessman, asked upon hearing news of President Obama’s proposed 0.5 percent increase in pay for federal workers this year after two years of salary freezes. The proposed pay raise prompted a frenzy of opposition, as have similar wage proposals at the state and local levels.

“Most workers in the private sector do not get cost-of-living increases,” Mr. Manson said. “They only get increases based on productivity and skills. I would love to see that implemented in the government sector.”

David Motter, an Army veteran in Pennsylvania, endorsed a pay raise for nonunionized state employees this year, but noted that they had to wait a long time for the increase.

“I think going four to five years without a raise qualifies as sharing the pain and then some,” he said.

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