The situation would seem tailor-made for increased income for workers: Corporate earnings are up, as is worker productivity. But employers nationally and locally say they are finding that factors outside their control are holding back wages to the point that employees have lower buying power than in previous years.
Eric Shorr, president of PC Troubleshooters in Warwick, said he expects pay raises to be less this year for his seven employees compared with last year because of higher energy and health care costs. Fuel costs are up between 10 percent and 20 percent, while health care costs are up nearly 25 percent over last year.
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Shorr’s story is not unique and shows up on a national scale through increased inflation and lower nominal wages, which combine to create lower real wages across the economy. In fact, from 2003 to 2004, the most recent full-year statistics available, real wages fell by 0.8 percent, the largest decrease in nearly 15 years, according to the Bureau of Labor Statistics.
Jared Bernstein, an economist with the Economic Policy Institute in Washington, D.C., said there are two factors that determine real wage fluctuation: the growth rate of nominal pay – compensation before inflation – and the rate of inflation.
It is rare for an employer to cut an employee’s nominal pay, but spikes in inflation – in this case caused by energy costs – make it more likely that an employer would decrease the amount of a raise to save on labor costs, he said.
In late 2003, in response to the recession of the early 2000s, nominal wage growth slowed, and with inflation remaining at a constant rate, real wage earnings began to fall. On a year-to-year basis, real hourly wages were down in all but two of the last 19 months, according to Bernstein.
“[Real wages] should improve as inflation settles down and nominal wages continue to grow slightly,” said Bernstein.
Abbas Kazemi, associate professor of economics and finance at Rhode Island College, said an employer cannot just look at wages but must look at the entire package that includes benefit costs. With health care costs, total compensation can actually go up without a wage increase.
There are two additional factors that could cause productivity and real wages to have an inverse relationship: a substantial influx of new workers in the market or a tight monetary policy initiated by the Federal Reserve that would increase the interest rate to borrow money to control inflation, said Kazemi.
Earlier this month, the Fed increased interest rates for the 13th straight time. This action increases the cost of borrowing and can slow hiring, said Kazemi.
