The Poor Are Getting Poorer; Is It Time to Raise the Minimum Wage?

Real wages have been falling during since the recession ended. And the reasons why might be much deeper than a weak recovery.

One of the harshest realities of America's slow economic recovery -- and there are many -- is the fact in spite of modest job growth, pay for workers is falling. Year over year, average inflation adjusted wages have dropped by 0.6 percent for all private sector employees. They're down a full 1 percent for non-supervisors -- your retail salespeople, your shop floor factory workers, your cashiers. In other words, even as the overall employment picture has improved in fits and starts, the working poor are getting poorer.

Some believe this is a sign of the recovery's weakness, and today the National Employment Law Project used it as a rallying point to call for a higher minimum wage. According to their analysis, which is current through the beginning of 2011, while the bulk of job losses during the recession affected medium wage earners, such as paralegals and nurses, most of the hiring post-recession has been for low-paid service work. Middle class jobs, they argue, have been replaced with poverty wage jobs.

I read the situation we're in a bit differently, but not much more optimistically. As I've written before, part of the reason real wages are dropping now is that, counterintuitively, they rose during recession, as shown in the graph below from the Bureau of Labor Statistics, which tracks hourly earnings of all private sector, non-supervisory employees. Note the sudden spike that began in late 2008, as the financial world melted down. Pay had been stagnating for years. Why did it shoot up when the economy went haywire? As NELP's own findings show, it's not because companies handed pink slips to a disproportionate number of poorly paid workers. Quite the opposite. Instead, it appears that many of those who were lucky enough to keep their jobs received small pay hikes (yes, econo-nerds, I am talking about nominal wages), despite the fact that inflation plunged into negative territory. That combination gave a significant bump to inflation-adjusted wages at a time when employers could least afford it.  

In short, the labor market got warped. Now it's straightening out. This might be good for job creation, since companies should theoretically be more willing to hire workers if they're cheaper to pay.

But here's the alarming part. All of this might simply mean that the same forces that caused wages to stagnate before the recession will make them stagnate after the recession. It's just another sign that income inequality is here to stay, unless something radical changes that will give working class families a larger slice of the pie. Will raising the minimum wage do that? It might help on the margins, certainly for the 3.8 million workers who earn it.  (I'm not one of those who believes that a higher minimum wage actually kills jobs. This great, short Slate piece from 2004 explains why.) But the vast majority of American workers won't see much benefit from it. Rather, fixing the wage problem means we need to think about the fundamental problems skewing income growth towards the top, from spiraling CEO pay to an inadequate education system.

Falling wages are taking us back to where we were before the recession. For many workers, that's not a good place. And there aren't any easy ways out of it.