For Third Year Running, Americans' Take Home Pay Falls – Here's Why

Once again, the lesson is that basic economics matters.

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The National Employment Law Project (NELP), a left wing research and advocacy group, released a study showing compensation for Americans essentially fell in 2014:

Despite steady gains in hiring, a falling unemployment rate and other signs of an improving economy, take-home pay for many American workers has effectively fallen since the economic recovery began in 2009, according to a new study by an advocacy group that is to be released on Thursday.

The declines were greatest for the lowest-paid workers in sectors where hiring has been strong — home health care, food preparation and retailing — even though wages were already below average to begin with in those service industries.

This isn’t the first time the NELP has sung this tune. They sang it in 2013:

Americans’ after-inflation wages have dropped by almost 3 percent since President Barack Obama’s inauguration, according to a new analysis by a left-wing advocacy group.

The biggest drop was felt by lower-income workers, while upper-income professionals were hit by a 2 percent drop.

The study was released by the National Employment Law Project, which is headed by left-wing employment lawyers, union officials and a former economist in Obama’s White House, Jared Bernstein.

During that time, they’ve been big advocates of raising the minimum wage and supporters of the Fight for $15 crowd, because forcing employers to pay more for low-skilled labor will fix everything, or something.

The question is, with steady gains in hiring, a falling unemployment rate and other signs of an improving economy, why aren’t wages increasing?

Think tanks on the left will tell you it’s greed:

One explanation may lie in the findings of another study released on Wednesday by the Economic Policy Institute, also a liberal research group. Its report showed that even as labor productivity has improved steadily since 2000, the benefits from improved efficiency have nearly all gone to companies, shareholders and top executives, rather than rank-and-file employees.

It isn’t greed. It’s simple economics. Wages are a price put on a person’s labor.

Potential Performance

What causes the price of something to rise or fall? Supply and demand:

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Right now, despite the fact that there are increases in hiring, there’s still a huge supply of unemployed Americans. Sure, you’re told unemployment is lower, but when you really get in the numbers, you’ll see that’s not all true. Sen. Bernie Sanders explains:

 

“Real unemployment is not the 5.3 percent which the newspapers report. That’s ‘official unemployment.’ Real unemployment includes those people who have given up looking for work and the millions of people who are working part-time when they want to work full time. When you add that together, real unemployment in America is almost ten and a half percent.”

He’s talking about the U-6 unemployment rate, and he’s right.

The number of Americans classified as “long term unemployed” sits at 2.2 million people. That means over 2 million people haven’t had a job in 27 weeks or more. In the last year, that number has dropped by 779,000. Sanders also mentioned people working part-time when they want a full time job. Over six million Americans fit that description and the number is growing. Since July, 158,000 more people who prefer full time jobs were working part-time. Either they were’t able to find a full time job or the job they have cut their hours back.

A lot of the time, folks working part-time will opt for more hours over a wage increase, impacting the overall average.

The story above from the New York Times says that economists were expecting a hiring gain of 220,000 jobs today. It was only 173,000, the smallest gain in five months.

The number of unemployed or underemployed in America represents a large supply for a tepid, at best, demand for labor, there’s no reason for employers to pay more except to keep good employees on staff. But even then, there’s a limit.

The Federal Exchange of Chicago agrees, saying unemployed and underemployed keep wages lower.

We estimate that average real wage growth would have been roughly one-half of a percentage point to 1 percentage point higher in June 2014 if labor market conditions had been similar to those of 2005–07. Thus, it appears that the slack in the jobs market still weighs heavily on the real wage prospects of American workers.

There are other reasons also. While wages might not increase, the cost of benefits do. In other words, people do get a raise, just not in cash.

Cost Reduction

The lesson here is once again that basic economics matters. It’s easy to blame faceless corporate CEOs and greed, but the fact is simple: the economy has not recovered to the point where low-skilled workers can demand more for their labor.

If you’re not convinced it isn’t greed, think about it like this. You buy milk. When you go to the store, rather than a cooler of milk, there are vendors there. Each day you go to buy, there are more people selling. Now, the people you’ve been buying from want you to pay more for their milk than the others are selling theirs for.

Would you pay more when you didn’t have to? Maybe, if the vendor provides a better product than the others and you value them more. But if they aren’t better but just cost more, or if another vendor provides more for the same, would you pay more?

Why should businesses?

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