Tuesday, April 12, 2005

Falling Fortunes of Wage Earners

The New York Times
April 12, 2005
Falling Fortunes of Wage Earners

Beginning in the mid-1990's, pay increases for most workers slowly but steadily outpaced the rate of inflation, improving the living standards for nearly all Americans. But an unexpected reversal last year in those gains has set off a vigorous debate among economists over whether the decline is just a temporary dip or portends a deeper shift that may cause the pay of average Americans to lag for years to come.

Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade.

"Pay increases are not rebounding, even though the factors normally associated with higher pay have rebounded," said Peter LeBlanc of Sibson Consulting, a division of Segal, a human resources consulting firm.

The problem is not with the jobs themselves. Most economists dismiss as overblown the widespread fear that the number of jobs will shrink in the United States because of foreign competition from China, India and other developing nations. But at the same time many of these economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off.

"We're in for a long period where inflation-adjusted wages will be under acute pressure," said Stephen S. Roach of Morgan Stanley. "That's a most unusual development in a period of high productivity growth. Normally, real wages track productivity."

But some economists are more optimistic, saying that the wage sluggishness is temporary and that real wages have slipped only because a sudden spike in oil prices has briefly left workers behind the curve. These economists assert that wage stagnation will end soon, as normal growth brings a tighter labor market.

"What we're seeing now is not atypical; employers can't pay the wage bill to keep up with the oil price increase," said Allan H. Meltzer, an economist at Carnegie Mellon University. "I think the long-term trend will be that wages will right themselves and look like productivity growth on average."

The most commonly used yardstick of wages - the Bureau of Labor Statistics' measure of nonsupervisory private-sector workers, covering 80 percent of the labor force - fell 0.5 percent last year, after inflation. Real wages for these workers are now lower, on average, than two years ago. A broader measure, the employment cost index, which includes supervisors, managers and most government workers, dropped 0.9 percent.

At a Sprint call center in North Carolina, 180 customer service representatives are well aware of how such forces are squeezing them. Their jobs have not migrated overseas, but the employees just concluded their most bruising battle ever over wages.

The Sprint workers in Fayetteville emerged from negotiations that lasted months with a contract that left them with a pay freeze for last year and no definite increase for 2005. While the best performers are promised 2 percent merit raises, even those are likely to lag inflation.

"It's like their wages are in a severe coma," said Rocky Barnes, president of the union local. "Sprint said they had to restrain wages because the company's performance wasn't so good, but we think a lot of it has to do with offshoring."

Sandra J. Price, a Sprint vice president, took issue with union leaders. She said Sprint sought the freeze not because of low-wage competition overseas, but because benefit costs were soaring and the company felt the call center's compensation was generous for the area.

Whatever the explanation for Sprint's action, many economists, liberal and conservative, are perplexed by two unusual trends. Wage growth has trailed far behind productivity growth over the last four years, and the share of national income going to employee compensation is low by historic standards.

Mr. Roach of Morgan Stanley said wages were being held down by foreign competition; corporations that are moving jobs offshore; the uncertainty of businesses over demand; and management's ability to substitute computers and other devices to replace workers.

"These factors aren't going to go away," he said. "The competitive pressures for companies to hold the line on labor costs are intense, and the alternatives they have - technological substitution and offshoring labor - are growing."

The overall wage figures hide a split, with an elite group getting relatively large gains. In a study of census data, the Economic Policy Institute, a liberal research group, found that for the bottom 95 percent of workers, after-inflation wages were flat or down in 2004, but for the top 5 percent, wages rose by an average of 1 percent, with some gaining much more.

The upper-income group enjoyed strong pay increases largely because of bonuses, stock options and other inducements and because of robust demand in certain fields, like law and investment banking.

J. Bradford DeLong, an economist at the University of California, Berkeley, said that current wage patterns, while perhaps only temporary, did not conform to traditional economic explanations.

"You'd think that with the unemployment rate near 5 percent and productivity growth so strong, employers would be anxious to raise payrolls and would have plenty of headroom to raise wages," he said. "But they're not."

Since 2001, when the recovery began, productivity growth has averaged 4.1 percent a year; overall compensation - wages and benefits - has risen about one-third as fast, by 1.5 percent a year on average. By contrast, over the previous seven business cycles, productivity rose by 2.5 percent a year on average while compensation rose roughly three-fourths as fast, by 1.8 percent a year.

"The question is not whether corporations are seeking higher profits; the question is how come they're getting them to such a degree at the expense of compensation," said Jared Bernstein, an economist with the Economic Policy Institute. "I'm struck at how successful they've been at restraining labor costs."

Labor unions' declining bargaining power has given corporations a stronger hand to hold down wages, he argued, but more recent trends, including the emergence of Wal-Mart Stores as a central force in the economy, now play crucial roles, too.

Laurie Piazza, a Safeway cashier in Santa Clara, Calif., said she reluctantly voted to approve a pay freeze in the first two years of her union's three-year contract because Safeway insisted that it needed to hold down costs to compete with Wal-Mart. Her take-home pay will fall $20 a week because the contract reduces the premium for working on Sundays to 33 percent of regular pay, from 50 percent.

"We tried to get weekly pay increases, but the company wouldn't do it," said Ms. Piazza, who earns $19 an hour after 18 years on the job. "I think Wal-Mart has a lot to do with this. They're setting the model."

With Wal-Mart moving aggressively into California with supercenters, Safeway officials say they need to clamp down on what they consider high labor costs to meet the challenge.

Last year's double-digit rise in health costs helped squeeze wages as well; many companies also required employees to cover more of the premiums out of their own pay.

"Benefit costs are rising fairly substantially, and that may explain the tendency to hold down wages," said Sylvester J. Schieber of Watson Wyatt, a human resources consulting firm. "If you throw an extra 10 percent into your health plan, that can suck 1 percent out of your budget for compensation."

Many executives say they are offering raises that do not exceed inflation. Pitney Bowes, which provides mail and document-management systems, plans to offer merit raises averaging 3 percent this year, about equal to the expected inflation rate, compared with recent merit raises, also in line with inflation, averaging 2 percent to 2.5 percent.

"The past couple of years we've maintained a moderation of our wages," said Johnna G. Torsone, the company's chief human resources officer, who noted that the company has had to greatly increase spending on health and pensions.

While agreeing that these factors are important, Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages.

"Globalization is going to make it harder for American workers to have the wage increases and the benefits that we might have expected," he said.

Facing intense foreign competition, Delphi, the auto parts manufacturer, has decided against any merit raises this year for its salaried workers. And at its air bag and door panel factory in Vandalia, Ohio, it persuaded unionized workers to accept a three-year pay freeze, warning that the plant would be closed otherwise.

"The majority of workers felt they had to agree to this," said Earl Shepard of the United Steelworkers local in Vandalia. "People here say the big problem is competition from Asia."

Lindsey C. Williams, a Delphi spokesman, said the company was seeking to keep the Vandalia factory "viable" and was working with the union.

Many economists say the nation may be returning to a period like 1973 to 1996, when inflation-adjusted wages stagnated or rose glacially. That era was a reversal from the golden years of 1947 to 1973, when wages marched steadily upward.

From 1996 to 2001, wages grew strongly again because of an unusually low jobless rate, caused in part by the high-technology boom. In the late 1990's, the tight labor market pressured companies to give sizable raises to attract and retain workers even as a surge in productivity helped business afford them without substantially cutting into profits.

Thomas A. Kochan, an economist at the Massachusetts Institute of Technology, said wages could once again rise, but only if there was especially robust economic growth.

"To produce real wage gains now, it takes sustaining a very tight labor market," he said. "Without that, we're going to continue to see what we're seeing now: abysmal growth in real wages."