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5 Reasons Your Pay Isn't Rising as Fast as it Should

CBSNews -- Although the U.S. economy is growing and hiring has picked up, wages haven't kept pace. Since most Americans depend on their pay to survive, the "recovery" that followed the Great Recession has felt like a treadmill.

Although the U.S. economy is growing and hiring has picked up, wages haven't kept pace. Since most Americans depend on their pay to survive, the "recovery" that followed the Great Recession has felt like a treadmill.

The latest federal data show just how slowly that treadmill is moving. Average hourly earnings for all workers rose a meager 0.1 percent in December -- or two cents -- from the previous month and are up only 1.8 percent from the year-ago period. In other words, wage growth is barely keeping up with inflation, which means that in terms of real income most people are barely trudging forward. 

 In theory, wages should grow at the rate of inflation plus the rate of growth of productivity. But in the last several years wage growth has been below this benchmark. Why? Here are five factors that are conspiring to restrain wage growth. 

Large supply of unemployed workers: The unemployment rate has fallen steadily during the recovery, and though it hasn't fallen as fast or as much as we'd like, it has fallen from 10 percent in October 2009 to 6.7 percent in December 2013. However, full employment is likely in the 5 percent to 6 percent range, and there are a substantial number of discouraged workers -- people who would like to work but have given up due to poor labor market conditions -- who will likely return to the labor force as conditions improve. Thus, even though the unemployment rate has fallen there is still a large excess supply of workers who would be willing to work at the current wage or perhaps even at a lower wage than existing workers are receiving (there are currently 2.9 job seekers for each job opening). Because of this, existing or newly hired workers have little to no bargaining power during wage negotiations, and that holds wage growth down. 

Automation: During the recession large numbers of workers were laid off due to the poor economic conditions, but as conditions have improved firms have not hired all of these workers back. Instead, firms have used the recession and recovery as an opportunity to replace the workers with robots, computers, and so on. The result is that the demand for workers is weaker than it would be without this automation, and weaker demand growth translates into less upward pressure on wages.

Hollowing out of the middle class: In the past, automation replaced the lowest wage jobs, such as repetitive factory work. As this happened, displaced workers generally were able to find new, higher paying jobs and the result was that average wages tended to rise. However, more recently automation is replacing middle class jobs, and in many cases the displaced workers are forced to take lower paying jobs when they are rehired. Some workers are still moving up the wage ladder after they are replaced by technology, but there are enough workers taking lower paying jobs to keep average wages growing at a meager pace. As noted recently at Bloomberg, many economists believe this is why the median wage for workers 25 and older has declined by 10 percent since 2007.

Decline in unionization: During the last few decades, unionization has declined considerably. According to a report by the liberal-leaning Economic Policy Institute, "the share of the workforce represented by unions declined from 26.7 percent to 13.1 percent" from 1973 to 2011, and this has led to a corresponding decline in worker's bargaining power. Although this is controversial, it may be that the decline in bargaining power affects the split between profits and wages within a firm, and helps to explain why profits have been so robust during the recovery while wages have stagnated.

Globalization: Another reason for the inability of workers to bargain for higher wages is the ease with which many jobs or entire production facilities can be moved to new locations around the world where labor is very cheap. This is not unique to the recovery period – much like unionization it is part of a longer run trend – but it does help to explain why workers have had a difficult time bargaining for higher wages during the recovery period.

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