Money Mondays: Why Wages Are Important

 

Mellody Hobson is president of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.

TOM: You’re talking about wages this morning?  

MELLODY: I am, Tom. We have talked a bit about wages on “Money Mondays” a couple of times, but I wanted to dig a little deeper today. As you know, the economy has continued to show signs of growth, and we have seen significant improvements in the unemployment rate, consumer confidence and productivity, but wage growth has not been among the things that people are talking about, and for good reason. Wages in the U.S. continue to stagnate for lower-and middle-class workers. And among lower-wage workers, minorities are disproportionately impacted.

TOM: What are we seeing in terms of productivity vs. wages?

MELLODY: As I mentioned, productivity continues to rise. Productivity reflects how much employees produce in an hour of work, and U.S. companies and workers were more productive in the third quarter of 2014 than initially reported. Productivity grew at a 2.3% annual pace, significantly better than the initial estimates of 2%.

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In contrast, wage increases have been slight, at best. While the amount of compensation employees receive per hour of work rose in the third quarter after declining in the spring, the increase was small, clocking in at only 1.3% before inflation. That’s down from an initial estimate of 2.3%, and when adjusted for inflation, the real rise in wages was a scant 0.2%.

TOM: If everything else is going in the right direction, including productivity, why are wages not keeping up?  

MELLODY: Some of the stagnation, at least in recent years, can be explained by the fact that there were more people seeking work than there were positions to be filled. Because of that, employers could hire candidates at lower wage due to the competition for the job. That situation is shifting now, however, and we should see some positive movement in wages as the labor market becomes more advantageous for workers. Some of the damage done in the recession continues to linger, though.

For example, many people who work low wage jobs have to hold down multiple jobs, or work in jobs have with uncertain work schedules, which means that they are confronted with unstable incomes at times, and that can really trap people. In the longer term, inflation has overtaken the minimum wage rates that were intended to be wage floors in the past.

That means that the minimum wage in most places is not a living wage. On top of this, you have the fact that America’s workforce in manufacturing and other blue-collar jobs have seen competition emerge in countries around the world. As this has happened, the incentives to pay workers for productivity have been overwhelmed. All of this has contributed to stagnant wage growth.

TOM: What do stagnant wages mean for people and the economy?  

MELLODY: The slow growth in wages — a persistent trend since the recession ended more than five years ago — helps explain the slow recovery. Hourly compensation has risen just 2.2% in the past four quarters, compared to a post-war average of 5.1%. As you know, tom, consumer spending accounts for about 70% of the economy in the united states. This has broader ramifications. Without greater wage growth, it is harder for people to save for retirement or invest. It means that people will not buy a bigger house, or a newer car. And that is bad news for individuals, and for companies that rely on them as customers.

TOM: Are we seeing signs that things could get better on the wage front?  

MELLODY: On a positive note, I think there are some signs suggesting we might be turning a corner. During this year’s election, all jurisdictions that had proposals to raise the minimum wage saw them pass easily. I think we will see a broader movement toward a living wage at all levels in the near future. Additionally, continued downward movement in unemployment rates will help to boost wages. Generally, once the economy gets to full structural employment – between 5-5.5% – wage growth tends to accelerate faster. Any growth in wages will benefit everyone, Tom!

TOM: Thanks for being on this morning! Have a great week!

MELLODY: You too, Tom!

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