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Why wages aren't rising faster

Erin Fuchs
Deputy Managing Editor

The unemployment rate in the U.S. is at a 50-year low, and a recent survey shows that 23% of America’s small business owners describe finding qualified workers as their No. 1 problem. Both measures suggest the labor market is getting tight and that wage growth should accelerate as employers are forced to pay up for talent.

But the last jobs report showed decelerating wage growth — with gains of just 2.9%, the lowest since July 2018.

Why aren’t companies paying people more if they’re hurting for help?

“The labor markets are healthy ... Wage inflation generally speaking, though, is still relatively muted ... It stays around 2.5-3% everywhere you look, even when the labor markets are very tight,” Jonas Prising, CEO of staffing firm ManpowerGroup (MAN), told Yahoo Finance at the World Economic Forum in Davos, Switzerland, on Wednesday.

There are three main factors keeping wage growth stagnant, according to Prising: a lack of meaningful productivity increases; the misleading nature of average wage growth figures; and the ability for employers to go overseas to find cheaper labor.

Jonas Prising, Chief Executive Officer of ManpowerGroup attends the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland January 22, 2016. REUTERS/Ruben Sprich

In December, the Bureau of Labor Statistics reported that productivity had decreased by .2% for the third quarter of 2019 even though hours worked increased by 2.5%. And as the World Bank noted in a report earlier this month, productivity growth is slowing around the world.

“A big driver for wage inflation has to be productivity increases, and as you well know, across the world, we have not seen a significant boost in productivity, which means you can’t really afford to pay wages that are much higher,” Prising told Yahoo Finance at Davos. “So that would be one factor.”

Still, Prising pointed out that the average wage growth can be misleading — some workers are in fact seeing more wage growth than others. “Averages are meaningless,” he noted.

In October, the Federal Reserve Bank of Atlanta noted that wage growth was accelerating for lower-skilled jobs amid conversations about raising the minimum wage to $15 an hour. Indeed, the start of 2020 saw minimum wage hikes in 21 states and 26 cities and counties, according to the National Employment Law Project.

In the past, those in higher-skilled positions have made more wage gains than lower-skilled workers, Prising noted. “So now we’re catching up,” he said.

One other big reason wages aren’t rising faster: Companies that don’t want to pay higher salaries in a tight labor market may opt to employ cheaper workers overseas. While restaurants and other service-oriented industries may be forced to pay rising wages in the U.S., companies that have call centers or manufacturing facilities may choose to find less expensive workers abroad.

“You have global wage transparency to a degree that you’ve never had before. You’re fully aware of where you reach a break-even point of having a worker in a physical location in the states ... or having the work done somewhere else by a worker that is paid either in another country or another geographic location within a country,” Prising noted. “That we believe has acted as a dampener [for wage growth ....] because today as an employer you have other options as to where the work gets done.”

Erin Fuchs is deputy managing editor at Yahoo Finance.

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