Why Wage Growth Is So Weak

The yearly growth rate of average hourly earnings in production and non-supervisory employment in the private sector eased to 2.3% in June from 2.4% in May.

Many experts are puzzled by the subdued increase in workers earnings. After all, it is held the US economy has been in an expansionary phase for quite some time now.

Softer real output growth important reason why hourly earnings remain under pressure

According to the US Government’s own data, since 2000, in terms of industrial production, the US economy has entered a subdued growth phase. (Note that between 1945 to early 2000 the industrial production index had been following a visible uptrend). Therefore, it seems the underlying ability of the economy to grow has been visibly undermined. So from this perspective, the slow growth rate in output could be an important reason behind the softer wages growth rate.

Some commentators such as the vice chairman of the US Federal Reserve Stanley Fischer has suggested that slowing productivity could be an important factor behind all this.

That a fall in the productivity of workers could be an important factor is a good beginning in trying to establish what is really happening. It is however, just the identification of a symptom — it is not the cause of the problem.

Now, higher wages are possible if workers’ contribution to the generation of real wealth is expanding. The more a particular worker generates as far as real wealth is concerned the more he/she can demand in terms of wages.

An important factor that permits a worker to lift productivity is the size and the quality of the infrastructure that is available to him. With better tools and machinery, more output per hour can be generated and hence higher wages can be paid.

It is by allocating a larger slice out of a given pool of real wealth towards the build-up and enhancement of the infrastructure, that more capital goods per worker emerges (more tools and machinery per worker). This sets the platform for higher worker productivity and hence to an expansion in real wealth and thus lifts prospects for higher wages. (With better infrastructure workers can now produce more goods and services).