Wages in America have been stagnant for four decades. Two generations of workers have seen annual real-wage growth of barely 0.2 percent. The average worker today is earning only 10 percent more than in 1973, after adjusting for inflation. Wage growth has gone disproportionately to one group: skilled workers.
These trends only worsened after the Great Recession. Weak productivity growth and enormous slack in the labor market pushed wage growth into neutral. Since the end of the recession in June 2009, prices have increased faster than salaries. Even in 2017, with unemployment holding steady at slightly above 4 percent — a 17-year low — there have been few signs of fatter paychecks.
It has been an enduring mystery. Consistent economic growth and strong hiring should have raised wages. Instead, for reasons observers have struggled to explain, low inflation and productivity growth persisted, and wages stagnated.
But that may be changing. In hot labor markets — such as Minneapolis, Austin, Denver, and San Francisco, as well as a host of smaller metros — wages are rising. Where the unemployment rate is 3.5 percent or lower, locals are seeing wage increases often well above the national average of 2.5 percent a year.
More than 40 percent of U.S. cities report wage increases over the past year, according to a survey by the National League of Cities. Large suburbs, such as Plano, Texas, north of Dallas, and Scottsdale, Ariz., east of Phoenix, report wage growth as a significant economic driver. The smaller metros of Fort Myers, Fla.; Des Moines, Iowa; and Ogden, Utah, are also seeing wage increases, well above 4 percent year on year.
It is in the largest metro areas, however, that the greatest number of Americans are seeing their wages grow. Minneapolis, with its low unemployment rate of 2.4 percent, is now enjoying the fastest annual wage growth it has seen in the past six years. It is a similar story for Indianapolis, where private-sector pay rose by nearly 5 percent last year.
This is not a story of the rich getting richer. The least well-paid and least educated Americans in the work force are seeing proportionally bigger wage gains nationwide, often well above 4 percent a year. For factory workers and truck drivers, for example, job gains and wage growth have been impressive. Of course, well-paid and highly skilled workers, too, are seeing their paychecks grow. Construction, manufacturing, and information-technology industries are willing to pay top dollar for talent.
Out-of-towners are flocking to metros that are hot hubs for labor, especially skilled labor. Austin is swamped with migrants from Los Angeles and New York City. They bring with them wage expectations well above those of their peers in Texas, resetting salary expectations for everyone.
Why these pay gains, and why now? Demand is booming, even if productivity isn’t. Global markets are hungry for U.S. exports made attractive by a weak dollar. The domestic economy appears robust, thanks in part to a rebound in oil prices last year. Oil states, including Texas and Oklahoma, accounted for nearly all the growth in manufacturing employment in 2017.
A perpetual labor shortage in technology hubs is also becoming acute. San Francisco and San Jose have unemployment rates below 3 percent and annual wage growth at or near 7 percent. Because high housing costs close off America’s most prosperous cities to many, some large tech firms are giving six-figure bonuses and generous perks to workers, who even then can barely scrape by.
Employers are beginning to respond generously, if gradually, to tightening labor markets. Companies are boosting wages, offering better benefits, investing in on-the-job training, and relaxing work requirements. These measures often lag job growth. As Cathy Barrera, chief economist at ZipRecruiter, told the New York Times, “the wage growth rate kicking in isn’t an automatic thing that happens in the economy.” Rather, “it requires employers to feel that friction, that competition for talent, to change what they offer recruits.”
Nationally, Walmart recently announced that it was raising its minimum wage to $11 an hour. While the company’s CEO framed the pay increase as a windfall from President Trump’s recent tax cuts, the deeper story is that it is a bid by the world’s largest employer to staff its 1.5 million positions in America’s tightening labor market. Its rival retailer, Target, already raised its minimum wage to $11, last September.
Denver’s Bar Dough, a quaint Italian joint across the river from the city’s downtown, finds itself having to do more than simply hand out a few more dollars an hour to its waitstaff or dishwashers. Its chef, Carrie Baird, told the local weekly paper Westword that her restaurant tries “to stay competitive with pay and benefits” but also to create “an environment of teaching and cultivating.” Meanwhile, logistics firms in thriving warehouse markets, such as the Inland Empire in Southern California, are giving benefits usually associated with Silicon Valley startups. They offer packers and shippers free lunches from food trucks and provide reimbursed or on-site child care.
Money still speaks when it comes to recruitment in tight labor markets. Ultra Machining, a maker of medical and aerospace parts in Minnesota, told the Wall Street Journal recently that it is paying $5,000 hiring bonuses, plus an additional $2,500 to recruits who stay. More than half of Minneapolis-based manufacturers expect to increase wages this year. Staffing firms in the region told the Federal Reserve that they are seeing “a ton of wage pressure this year,” with pay increases from 5 to 7 percent.
Employers in larger metros no longer necessarily review hundreds of résumés in search of the best applicant. Seattle-area hotels now hire workers on the spot at job fairs and start them the next day. ADS Security in Nashville pays out a “sizeable” referral fee to employees who recommend a new hire, says its president and CEO, John Cerasuolo. “We have to be aggressive to hire and retain talent,” he tells me.
Aggressive recruitment and generous payouts appear to be bringing non-traditional workers off the sidelines — and employers are greeting them with open arms. In Suffolk County, Mass., which includes Boston, the sheriff’s department trains ex-offenders for work in the food-service, transport, and warehouse industries. “These employers aren’t concerned about your past criminal record,” department spokesman Peter Van Delft told the Boston Globe. “They want to know if you can make a good steak for their customers.” Something similar is true in Chandler, Ariz., where homebuilder Erickson Cos. recruited nearly 30 inmates directly from corrections-department job fairs. The director of education for Indiana’s department of corrections confessed to the Wall Street Journal that he’d “never dealt with employers who are more willing to hire ex-felons”; local construction firms, in particular, “are literally begging for workers.”
This hiring frenzy is not benefiting everyone, however. Retail-sector hiring remains stagnant in most metros. Work-force participation among prime-age men remains near a record low. Women are benefiting more from the job growth. The most persistent trend remains the increasing geographic gap: Growth in jobs and earnings in larger metros far outpaces that in smaller metros and rural America. Slower-growing and lower-paying occupations are still concentrated in the least densely populated regions. Declining rates of geographic mobility mean that some Americans remain in places where they will continue to earn less than those who live in the bigger population centers.
Even metros with strong wage gains face headwinds in 2018 and beyond. The ongoing departure of higher-earning Baby Boomers from the work force could act as an ongoing drag on aggregate wage growth. Meanwhile, the Federal Reserve will be keeping an eye on whether wage inflation leads to price inflation. If last year’s pay gains continue and spread nationwide in 2018, the Fed will have a growing incentive to raise interest rates, to slow the economy.
That is, if we are truly reaching “full employment.” Labor-force participation remains stubbornly low. Millions of workers left employment rolls during and after the 2008 financial crisis, some never to return. Many are still in the prime of their working years and have decided to take a job again, but many of their peers are sitting out by choice, or because of illness or disability. Their presence on the sidelines may continue to exert a downward pressure on wage growth well into 2018 and beyond.
And as Ryan Avent argues in his book The Wealth of Humans, a growing abundance of cheap labor may enable companies to produce more without paying more. If workers ask for raises, bosses can automate their jobs, move the jobs abroad, or replace many workers with a handful of superstars. The options left to employees in these situations seem narrow in comparison, especially for those who are older or less skilled.
Nevertheless, wage growth will likely continue in 2018, especially in urban America. Only now are employers starting to respond to a long-running tightening of the labor market. And workers with choices will be choosy. In December, Federal Reserve chairwoman Janet Yellen said that the Federal Open Market Committee “expects the labor market to remain strong, with sustained job creation, ample opportunities for workers, and rising wages.” Even if the pace of job gains decelerated, thriving metros would still face hiring squeezes. That’s good news for American workers — but also for robots, as employers invest in technologies that boost productivity and decrease payrolls.
In Minnesota, Dotson Iron Castings employs about 140 workers, some of whom will soon retire. Rather than lose the skilled labor he will still have, owner Denny Dotson is installing robotic lifts to help older workers avoid lifting 50-pound castings. He’s also offering “phased-in retirements” whereby senior employees can work flexible hours with ample time off. “Obviously, when you have people with talent, you will be accommodating,” Dotson told the Minneapolis Star Tribune.
Such stories are easy to ignore in today’s political climate. Greater earnings for everyday Americans may be the most impactful trend of the new year. Lest policymakers forget, the fire and fury of Washington may bring the ratings, but the flourishing of wages buys the TVs.
– Mr. Hendrix is the director of state and local policy at the Manhattan Institute.