Should You Be Worried About Low Wage Growth?

Posted by | · | economics · financial planning

There’s no question that we have a healthy economy right now. At the time of this writing, the unemployment rate is at 4.4% and there are millions of job openings across the country. However, there’s one thing that isn’t pointing in the right direction, and that is the average hourly earnings of the American workers.


Even with low inflation, workers are still barely getting enough in raises to keep up with costs, which decreases their overall purchasing power. For example, in a healthy economy, pay raises are generally between 3%-and 3.5% each year. However, at the time of this writing, annual gains are only at about 2.5%. Why is this happening?


Well, there a few theories floating around.


#1. Previous Temp/Part-Time workers viewed as “Less Qualified”

One theory is that the many people who either lost their job or were stuck with part-time or temp jobs are being stigmatized as “low quality” workers who don’t deserve an increase in pay. While these workers are now full-time employees, their employers may view the added job security (the switch from temp to perm or just having a job at all) as a benefit in itself and therefore don’t feel the need to provide a higher salary or hourly rate. The problem with this theory is that it fails to account for the fact that employers now have a much shallower pool of potential candidates and are likely increasing the pay of these already trained employees to retain them (i.e. stay competitive).


#2 Employers still playing catch-up

Another theory is that employers didn’t decrease enough employees’ wages in 2008-2009 and are now limiting raises in order to make up for what they lost in the Great Recession. The flaw with this theory is that even if they kept worker’s wages artificially high following the crash, we are now 9 years out and employers have more than made up for their losses at this point. While it’s possible that some companies are simply being greedy and keeping profits that should be passed onto employees, it’s unlikely.



Finally, there’s the theory that makes the most sense to us and that is what we are going to call the “Baby Boom Factor”. As you are probably well aware, baby boomers have been retiring at an astounding rate of about 10,000 per day. The question then becomes, who is filling these high-paying jobs? The answer is either no one (i.e. technology has made us much more efficient and no longer requires a full-time worker for that position) or a very ambitious youngster who is being paid half of what his predecessor was being paid (i.e. baby boomers were overpaid and the replacement simply isn’t.) Not only that, but entry-level workers are still working up their confidence and are likely afraid of asking for a raise. This is especially true if you haven’t yet established yourself in the field. And, if you don’t ask for a raise then you likely won’t get one. Therefore, fewer people are getting raises, and wage inflation suffering despite the historically low unemployment rate.


So should we be worried about the economy? Nope – but if you’re feeling underpaid, now is probably the time to speak up.


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