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Where's that Wage Increase?

A new report from the U.S. Census Bureau shows an increase in household incomes over the past few years, but wage levels don't seem to be rising. What's going on here?

Monday, October 2, 2017
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Recent front-page stories in The New York Times, The Wall Street Journal and other publications trumpeted the news about a U.S. Census bureau report that incomes had risen over this past year by 3.2 percent in real terms, which means taking inflation into account. That followed an even bigger rise in 2015, when it went up by 5.2 percent, again in real terms.

So, the stories go, we have finally turned the corner on the declining fortunes of working people, and things are improving.

Wow, that sounds great. But being ever the skeptic, I thought it might be useful to dig into that number a bit and check on what was really going on, because it doesn't seem to me that most people feel that they've gotten almost a 10-percent raise (with compounding) over the past two years.

The reason they don't feel that way is because they haven't. Let's dig into what has happened.

The first thing to note is the definition of this income figure. It is household income, not individual income, and that means the total income of everyone in the household -- husband and wife, partners, children, anyone with income living in that house. Household income could go up because the individuals in the household each got a raise at their job, because the individuals in the household are working more, because there are more people in the household or any combination of the three.

How does that break down, using the same survey results that produced the income figures?

First, let's look at the size of the household, specifically how many people are in it. For our purposes, we are interested in whether more people who are working are living in a given household. Is that figure growing? The Census identifies "shared households" as those where there is at least one adult in addition to the head of household and spouse or partner. That percentage has risen since 2007, from 17 percent to 19.4 percent. A different way to look at it is to simply count the number of people in a household over age 18, and that number has risen steadily since 2007, from 2.20 to 2.25 (although constant from 2015 to 2016).

The increases in the number of people in a given household may explain some of why household income has gone up since 2007 and maybe through 2015.

Another factor is how many people are working and how much they are working. The number of people who reported earnings is up sharply from 2007 to 2015, and up a bit from there to 2016. The number of people working full-time is also up over both periods, so some part of the increase in household income is because more people are working.

What if we look only at the earnings of individuals? There is no increase in real, median earnings for men or women from 2015 to 2016. (More precisely, the differences were not statistically significant.) When we look at men working full-time, their real earnings actually decreased between 2015 and 2016; women in the same category saw a modest increase of 0.7 percent.

So, what we've got here is that household incomes are up -- a good thing -- because more people are working and those people are working more -- probably a good thing as well. But when individuals think of a wage increase, they don't think that means the opportunity to work more hours. People who are already working full-time are not better off, and men in that category continue to do worse.

Of course, other not-so-great news is that, even with these changes, median household income is just about where it was in 2007 and still below its peak in 2000.

Having let the air out of that balloon, let's talk for a minute about the idea of higher wages. We are pretty ambivalent about the very idea of higher wages. We wring our hands, rightly so, about the fact that even though the country as a whole is getting wealthier, people who work in it are not. If wages start to go up, though, we wring our hands about the possibility that higher wages will make it harder on employers and could lead to inflation.

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Why are we having such a hard time getting higher wages, or at least keeping them from declining further?

It is true that productivity growth is the key to growth in the overall economy, but it isn't true that wages can only grow if productivity grows, just as productivity can grow without wages growing, which has happened in recent years. The fact that productivity has not been growing is at least in part because there is no wage pressure: Why spend money on technology to make labor more productive -- or what is the same thing, to reduce labor -- when it is so cheap to begin with? 

One explanation as to why wages don't seem to be going anywhere might well be that the labor market is not as tight as we sometimes hear that it is. Beyond that, I suspect the cause is a myriad of factors -- some having to do with how business operates, some to do with public policy -- that aren't going away anytime soon. So I'm not holding my breath about real increases in wages anytime soon.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. His latest book is "Will College Pay Off? A Guide to the Most Important Financial Decision You'll Ever Make."

 

 

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