From time to time, the numbers stop making sense at some point in the economic cycle. Unemployment goes down. Earnings for businesses go up. Executives get bigger bonuses. In spite of all that, the average worker’s paycheck is pretty much the same as it was five years ago, when prices for things are taken into account. That gap, which is big, stays the same, and doesn’t make sense, is what economists have started calling a mystery, perhaps with a hint of shame.
There is some information out there, of course. Some of it can be read. According to data from the Wall Street Journal, corporate profits in the United States rose 2.7% in the first quarter of this year, but worker compensation only rose 0.8%. It’s not a blip. That’s been going on for decades. The share of national income that went to corporations reached 14.2 percent in late 2012, which was the highest level since 1950. At the same time, the share of income that went to employees dropped to almost its lowest level since the mid-1960s. The math is easy to understand. What is less clear is why no one who has the power to change it seems to want to do so.
Part of the answer lies in corporate boardrooms, in the idea that shareholders should come first. Companies are required by law and culture to give investors the best returns possible. Wages, unlike stock buybacks or dividend payments, come straight from the company’s bottom line. It’s possible that this isn’t really greed but rather structure. If you do something that the system likes, you’ll keep doing it every quarter until it seems like nature rather than choice.
It’s also not easy on the job market side of things. When someone is always willing to work for the same pay, there isn’t much reason to offer more. This dynamic is most clear in low-skilled jobs, where workers are easy to replace and don’t have much bargaining power. But it’s also made its way into white-collar jobs in ways that no one saw coming. Things are worse now because of a lack of matching skills. Employers say it’s hard to find people to fill specialized jobs, but millions of workers are stuck in jobs that don’t pay enough. The two realities exist together, but they don’t solve each other.
There’s also the issue of worker mobility, or the lack of it. According to new data, wage growth slows down when fewer people are switching jobs. There is less wage pressure on everyone when the overall quit rate goes down. This is because workers who stay put tend to get smaller raises than workers who move. It’s a small mechanism that makes a difference. People having to be willing to leave is what gives the job market its energy and makes employers compete.
The psychological weight of stagnation is harder to measure. When workers see their real purchasing power go down while their company reports record quarters, they tend to come to their own conclusions. The anger isn’t just an idea. It’s clear in polls, the way people act at work, and the slow burn of economic dissatisfaction that doesn’t always make news but also never goes away.
After seeing this happen for years, it seems like the wage growth mystery was never really a mystery to the people who were going through it. The people who were measuring it didn’t know what it was. Economists who were confused by the difference between unemployment rates and wage growth eventually came up with structural explanations, such as changes in population, automation, globalization, and skills gaps. They are all real. Every one of them isn’t enough on its own.
Still, it’s not clear if the present will be any different. In most quarters, profit growth is still higher than paycheck growth. The gap isn’t getting smaller on its own. And the structural forces that made it happen—industry consolidation, weaker labor organizing, and tax and regulatory environments that favor capital—haven’t changed much. Not dramatic at all. That’s just how things are.
