By JED GRAHAM INVESTOR'S BUSINESS DAILY June 2 2011
The past decade of wage growth has been one for the record books — but not one to celebrate.
The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economywide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation).
Two years into the recovery, and 10 years after the nation fell into a post-dot-com bubble recession, this legacy of near-stagnant wages has helped ground the economy despite unprecedented fiscal and monetary stimulus — and even an impressive bull market.
Over the past decade, real private-sector wage growth has scraped bottom at 4%, just below the 5% increase from 1929 to 1939, government data show.
To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25% with one exception: the period ended in 1982-83, when the jobless rate spiked above 10% and wage gains briefly decelerated to 16%.
There are several culprits, of which by far the biggest has been the net loss of 2.7 million private nonfarm jobs since March 2001. (Government payrolls rose by 1.2 million over that span.)
That excess supply of labor has given employers the upper hand in holding back wage gains.
Then there is a dramatic, decade-long job shift that has occurred. The often higher-paying goods-producing sector, including construction and manufacturing, has shed 26% of its workers. Meanwhile, typically lower-paying service industries have kept growing their payrolls: social assistance (41%), nursing homes (21%), leisure and hospitality (10%).
"To the extent you have more hotels and fewer manufacturing jobs," the changing composition of the workforce has been a negative for wage growth, said John Silvia, chief economist at Wells Fargo Securities.
Behind this job shift is the globalization of production, which has fed "the substitution of capital for labor" amid a push for productivity and competitiveness.
"Brain, not brawn, is required" for today's high-skilled factory jobs in the U.S., Silvia said.
A third trend is the increase in nonwage compensation — fueled by the growth of tax-free health care spending — which has eroded real wage gains.
A fourth factor, rising food and fuel prices, has taken a bite out of real wage growth in the past year.
The long dry spell for real wage gains tests the natural resilience of America's consumer economy.
The 2001 recession produced what was then the longest wage recession since World War II, taking 40 months to surpass the prior peak.
By comparison, 40 months past the December 2007 peak, real wages remained nearly 7% off their high as of April 2011.
Even at their nadir in 2003, real private wages were still 40% higher than they were a decade earlier, which helps explain why the economy back then was responsive to tax cuts and easy credit.
So how has the economy managed to scale new GDP heights despite sagging real wages?
Real disposable income is up 3.6% since December 2007, thanks to nearly $1 trillion in government support via higher social benefits (up $583 billion since the recession began); lower tax bills (down $255 billion); and higher government wages and benefits (up about $125 billion).
Absent those sources of support, real disposable income would still be 5% below its prior peak.
The challenge now will be for real wage growth to displace unsustainable deficit spending.
On that score, the Conference Board's latest Consumer Confidence survey didn't offer much cheer.
"After a short run where more people believed their income would be higher in six months rather than lower, the relationship flipped in May — 15.2% believe income will fall against 14.8% believing income will rise (17% last month)," wrote ITG Investment Research economist Steve Blitz.
Just 14% of payroll gains came from high-wage industries during the first 12 months of the jobs recovery begun in March 2010, according to an analysis by the National Employment Law Project, an advocacy group for low-wage workers.
By comparison, 31% of the new jobs came from high-paying industries during the much-maligned jobs recovery that began in 2003 under President Bush.
At least partly to blame is the impact of the financial crisis, which hit high-paying sectors like construction and financial services.
Moody's Analytics Chief Economist Mark Zandi sees reasons for optimism amid evidence that job growth has broadened out in recent months.
"We are making progress righting a fair amount of the wrongs" from the past business cycle, he said last week.
Zandi noted strong business balance sheets, lower household debt-service burdens and declining delinquencies.
"All the dynamics are pointing to much better job growth and wage growth going forward," he said.
However, ADP's survey out Wednesday said just 38,000 private-sector jobs were added last month, including a decline in goods-related sectors. The figure raised doubts ahead of Friday's key employment report.