Weak Job Market Weighs On Wages

You don’t have to look far for reminders of the weak labor market.

Take the government’s report on personal income and spending in May.


Income rose 0.4 percent, while spending was flat.

Though the last two months have shown decent increases, income is up just 0.3 percent over the last year.

What’s more about half of the income gain in April was the result of government transfers, from tax refunds to regular benefits.

“There's nothing by way of wage growth," says Dean Baker, co-director of the Center for Economic and Policy Research. “Workers aren't in a position to be choosy.”

More specifically, real disposable income is up 0.7 percent over the past year, versus 3-4 percent gains during the economic expansion.

“It’s been terrible,” says economist Scott Anderson of Wells Fargo. "We're not getting as strong a bounce coming out of this recession as we did after the deep one in 1980-1982. You could see downward pressure on wages continuing for the next couple years."

“What you need to see is income growth coming from job creation,” adds Mara Ramirez, who runs her own economic consulting firm.

The economy is expected to create jobs again in April when the government makes its report next week. That would continue a recent run, but the unemployment rate has been stuck near 10 percent since last fall and weekly jobless claims remain unusually high for this stage of a recovery.

Economists say weak income growth is part of a somewhat dour portrait of the American consumer.

Ramirez, for one, points to the government’s first quarter tax-receipt reports, which shows a $100-billion decline from last year.

“I look at that as a real proxy for the economy, because it is not seasonally adjusted or revised,” she says. “We could see slowdown in spending in second half of year.”

Anderson agrees. Consumer spending is up 4.6 percent over the past year, well outpacing income, which he considers unsustainable.

“Its clear we’ve been dipping into our savings for the strong performance in consumption,” he says. “Consumers been fairly slow in paying down debt.

The debt-to-income level has barely dropped, from 125 percent to about 122 percent in the last year, showing that leverage remains an overhang.

There’s little debate what’s needed to fix the problem. Job creation begets wage growth. Until then , business will spend its money in other ways, from plants and equipment to stock buybacks.

“Why would employers pay more given the supply of workers?” asks Anderson.