Earnings Stagnation: How Will People Cope?

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Since the Great Recession of 2008, the U.S. economy has struggled to regain full momentum. This is most evident when you examine the earnings of most middle-class Americans. And a recent report by the U.S. Department of Labor seems to suggest that this trend shows little sign of abating.

The findings of this employment cost index report suggest that paychecks of U.S. workers grew at a very tepid rate this summer, rising a paltry 0.6% during the July-September period, compared to the April-June period. Overall during the past 12-months, pay and benefits have risen only 2%; well below the 3.5% to 4% that most labor economists feel is indicative of a healthy economy.

What all of this signifies is that there’s still an ample supply of workers for businesses to hire at much lower pay rates; an indication that the job market has yet to return to full health. Over the past year, employers have added 2.2 million new jobs which has resulted in a decline in the unemployment rate from 5.9% to a seven-year low of 5.1%. Nevertheless, wage advancement remains sluggish.

There is also the issue of the 6.5 million (at last count) Americans working part-time who really wish to work full-time. That accounts for about 2 million more workers than prior to the recession. And it is important to keep in mind that the unemployment figures have been skewed even further because millions more Americans have ceased looking for work altogether, even though they would take a job if offered one.

Federal Reserve officials view wages and salaries as the key metric in assessing the economy’s true health, because a sustained uptick in wages would signify a leveling out of the unemployment rate. As unemployment drops, businesses are often forced to increase their pay in order to attract and retain talent.

Unfortunately, according to many economic analysts, there are no signs of this trend occurring in the foreseeable future.

Upping The Minimum Wage: Help or Hindrance?

There has been a ton of media chatter this year about efforts by several states to boost the minimum wage. And for good reason, since wages are a hot issue, particularly among those Americans working in service-related jobs.

Unfortunately, the collateral damage is starting to rear its ugly head in states that have recently boosted the legal minimum wage. Take Seattle for example, which has been a hotbed of talk on this issue. According to the St. Louis Federal Reserve, which has been monitoring this development, the Emerald City began to experience declining numbers of restaurant employees around the first of the year, when the minimum wage increased to $9.47 per hour. This represents the highest minimum wage in the nation. The reported loss of 1,300 jobs between January and June is the largest drop off since the Great Recession of 2008. Moreover, 1,000 restaurant jobs were lost in May, following the minimum wage increase in April, the largest one-month job decline since a 1,300 drop during that recessionary period. This is in contrast to a national increase in restaurant jobs to the tune of 130,700, an overall 1.2% increase in employment in the Seattle area and a 3.2% restaurant employment increase in the State of Washington (excluding Seattle) – all during this recent period.

The bottom line is that small businesses like mom-and-pop restaurants and coffee houses lack the greater profit margins needed to withstand the expenses associated with a minimum wage increase. So they resort to cutting staff and reducing hours, paying fewer workers more money. Even well-funded enterprises like McDonald’s are reportedly pondering labor-saving methods like self-checkout kiosks, robots on the food production line and robots to manage expenses, all of which would lead to an overall reduction in staff numbers.

One fallout from all of this is that growing numbers of Americans are being forced to work two or three jobs just to make ends meet.  That is if they can even find work, for in cities like Seattle, there are indications that the demand for service workers is shrinking.

The Self-Employment Route

It’s no secret that an increasing number of workers have opted to start their own gig. According to Pew Research Center, 10% of Americans have opted for self-employment, accounting for 44 million jobs in 2014, or 30% of the national workforce. But according to this same report, the overall share of self-employed Americans has actually seen a decline, from 12.2% in 1994 to the previously mentioned 10% in 2014. I believe this latter trend is indicative of the need that many of us have for a steady W-2 income, coupled with benefits.

Kenny Goodlife, a resident of Detroit, utilizes a hybrid W-2/1099 approach for staying afloat in today’s evolving earnings economy. “I’ve had a traditional 9-5 automotive industry job for 20 years, and I am also an entrepreneur.” says Goodlife. “It can be a struggle though, because there are only 24-hours in a day to work with.” He notes that his tenure in the W-2 job gives him freedom over the stress that many newly-minted employees experience. “There is no doubt that I’m blessed to have more time, energy and creativeness to put into other pursuits than the average person who has been in their job a shorter period of time.”   

Goodlife says that amid Detroit’s well-documented economic woes, many residents have folded up their tents, disgusted by what they see as a lack of opportunity, electing to rely on a government check instead. He believes that Detroiters have been both blessed and crippled by the Big Three automakers’ long presence in the city. They have been ‘blessed’ by the fact that, historically, anyone could get a job (even with just a high school diploma), support a family and put a kid through college. And they have been ‘crippled’ by the dependency on this thinking, resulting in the slow emergence of an entrepreneurial mindset in the city. “It sucked a lot of drive and creativeness out of Detroit residents, because they always had that crutch of an automaker job. But growing numbers here are starting to recognize the need for a different mindset on this front, in order to capitalize on the opportunities bubbling up from the Motor City’s re-growth.”

Michael Scott is a Denver-based journalist focusing on the intersection between free markets and economic freedom. He can be followed on Twitter @biz_michael

 

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