The False Promise of Last Year's Wage Gains

An apparent boost in buying power was really just the product of a dip in inflation, according to a think tank’s report.

Gary Cameron / Reuters

While the economy has been doing better in general, one very important indicator of economic health remains painfully elusive: wage growth. For the majority of Americans, wages have remained fairly stagnant during the bulk of the recovery, and a new report from the left-leaning Economic Policy Institute suggests that even recent upticks are likely less substantive than they seem.

While worker productivity has steadily been growing over the past few decades, most employees’ paychecks haven’t been growing accordingly. Just how big is the disconnect? According to EPI, if wages had kept pace with productivity growth over 30 or so years, a worker making $50,000 today would instead be earning about $75,000. Instead, the gains from productivity have been channeled elsewhere, often to executives and shareholders.

In 2015, things seemed like they might be getting back on track. Nominal wages (that is, wage growth not adjusted for inflation) increased by 1.8 percent on the year. But according to the report, 2015’s uptick was caused by a decrease in inflation rather than an improvement in actual wages, and when looking at real wages (adjusted for inflation) and factoring in core inflation, which specifically removes more volatile portions of the inflation measure—wage growth was zero.

Wage Growth Since 2007

The fact that the underlying conditions of last year’s wage increase are more heavily tied to a temporary dip in inflation rather than economic improvements bodes poorly for continued wage growth. “Relying on low inflation to increase living standards is a poor long-term strategy,” writes Elise Gould, a senior economist at EPI and the paper’s author. Gould argues that while shifts such as lower oil prices certainly helped middle-and lower-income households stretch their paychecks further, locking in the benefits of such boosts would require that inflation rates remain near zero for a prolonged period—which is quite unlikely in the long run.

Equally disheartening are the report’s findings that the trend of growing wage inequality is continuing, and increasing. In 2015, overall wage growth remained fastest for those at the top of the earnings ladder. And despite wage growth among college graduates, Gould finds that the college premium has only increased modestly during the past 15 years.

Percentage Change in Earnings, by Income Percentile

The report isn’t completely bad news, though: The gender-wage gap showed some small improvement among lower-income workers (but women at the top saw essentially no progress). The report also finds that the states that showed the most significant wage gains for workers in the bottom decile of earners were those that had increased their minimum wages in the past year. These changes show that progress is possible, but probably requires policy changes.