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September 28, 2016

NY Fed: “Negative Growth” of Real Wages is Normal

And the fate of the consumption-based US economy?

The New York Fed published an eye-opener of an article on its blog, Liberty Street Economics, seemingly about the aging of the US labor force as one of the big economic trends of our times with “implications for the behavior of real wage growth.” Then it explained why “negative growth” – the politically correct jargon for “decline” – in real wages is going to be the new normal for an ever larger part of the labor force.

If you’re wondering why a large portion of American consumers are strung out and breathless and have trouble spending more and cranking up the economy, here’s the New York Fed with an answer. And it’s going to get worse.

The authors looked at the wages of all employed people aged 16 and older in the Current Population Survey (CPS), both monthly data from 1982 through May 2016 and annual data from 1969 through 1981. They then restricted the sample to employed individuals with wages, which boiled it down to 7.6 million statistical observations.

Then they adjusted the wages via the Consumer Price Index to 2014 dollars and divide the sample into 140 different “demographic cohorts” by decade of birth, sex, race, and education. As an illustration of the principles at work, they picked the cohort of white males born in the decade of the 1950s.

That the real median income of men has declined 4% since 1973 is an ugly tidbit that the Census Bureau hammered home in its Income and Poverty report two weeks ago, which I highlighted in this article – That 5.2% Jump in Household Income? Nope, People Aren’t Suddenly Getting Big-Fat Paychecks – and it includes the interactive chart below that shows how the real median wage of women rose 36% from 1973 through 2015, while it fell 4% for men:

This illuminates the New York Fed’s article with a slightly different hue.

The New York Fed report goes a big step further – with white men as an example, perhaps to avoid getting sidetracked into discussions about wages of minorities. It picked men born in the decade of the 1950s to show what happened to their wages over time. And since women’s real wages actually rose over the period, they might make a less persuasive example of how declining real wages should be considered the new normal.

In their analysis, the authors found a common pattern: Wages increase sharply early in the work life, but as workers age, wage growth begins to slow down. There are also variances based on educational attainment, which they separated into five cohorts: Master’s or higher, Bachelor’s, some college, high school diploma, and less than high school.

The chart below shows the percentage change of real wages (left, y-axis) as these men aged (horizontal, x-axis). As young adults, their wages soared by up to 10% a year. Then the rate of growth fell off sharply. When the men in this cohort turned 40 in the 1990s, wage growth disappeared. By around the year 2000, the real wage peak in the US, when the oldest men in this cohort turned 50, wages had begun to decline for most of them. By the time these men were in the mid-50s, their wages across the board were heading south – and for many of them, rapidly. Hence this colorful, drooping spaghetti:

This “negative real wage growth” – devastating as it may be for those experiencing it – is nothing special, according to the New York Fed. And it crushes not just white men, but everyone:
Real wages tend to rise early in a worker’s career, flatten out mid-career, and then decline as the worker approaches retirement. This inverted U-shape pattern is a well-established feature in the labor economics literature.
The report explained it further:
Labor economists explain the rapid real wage growth early in a worker’s career as a combination of on-the-job learning and better matching of workers to jobs. A large portion is due to job matching as workers change jobs in search of a position that better utilizes their skills. As workers age, the decline in the pace of their real wage growth reflects a diminished incentive to invest in new skills (because their remaining work life is shorter) and fewer job changes (because they have found a good job match).
The report divides life for its purposes into three phases, terms of wage growth:
  1. Fast growth, up to age 40
  2. Flat growth, ages 41-54
  3. “Negative growth,” age 55 and older.
Now there’s another problem mucking up the overall and ever-elusive real-wage growth miracle everyone has been counting on: demographics. The US population is aging. There are more people aged 40 and over in the workforce, and their incomes are now flat or declining.

The portion of the population in the first phase when wages are growing fast has plunged from close to 60% in the 1980s to the mid-40% range currently, the report said. And the portion of workers with wages in the “negative growth” phase has ballooned. Given the demographics, real wage declines among workers over 50 will continue to hammer the national averages.

That is why real wages in the US economy are in such trouble, and it’s normal, and the fact that it’s getting worse is normal too, according to the report.

But real wages determine consumer spending. Consumer borrowing can fill some holes, but not in the long run. In the long run, only wage growth can prop up spending. And if the current trend holds, as predicted by the report – with the number of workers over 40 ballooning – then consumer spending is going curdle further, for years or decades to come.
Or is it really all just inevitable demographics, as the New York Fed would have it?

Courtesy of Wolf Richter, Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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