This week began with some not-so-peaceful May Day protests around the world. Of particular interest was a demonstration in Seattle, where protestors demanded better wages and working conditions. Oh…wait…doesn’t Seattle have a $15 an hour minimum wage law? Evidently according to some, it is not enough for entry level work.
According to the Wall Street Journal, recent job gains and a low unemployment rate have not been matched by accelerated wage growth. Eric Morath notes that wages have only grown about 2 percent annually since 2012. Are the protestors on to something? Are companies just being greedy?
Maybe, but there could be other factors. Morath mentions some of them in his article: slack in the labor market despite low unemployment, low productivity gains for the service sector and low inflation growth. Morath also mentions that the cost of compensation (which includes non-monetary benefits) increased 1.9 percent from a year earlier. This may be a primary factor in slow wage growth and I think it bears more mention than a few lines in the WSJ. According to the BLS:
- In the first quarter of 2010, the average hourly wage across private industry was $19.58. However, the cost to the employer of health insurance, paid leave and legally required benefits (such as the Family Medical Leave Act, workers’ compensation and unemployment insurance) brings the “implicit” wage, or the cost to the employer, to $25.96.
- By first quarter 2015, the average hourly wage across private industry was $21.82. Add in health insurance, paid leave and legally required benefits and the implicit wage, or the employer’s cost, is $29.04. When factoring in employee retirement plans and supplemental pay, the hourly cost rises to $31.39 an hour.
While there has been some slight variation from quarter to quarter, generally the growth of the three compensation costs I mentioned have outpaced the growth of wages. The point here is that employers are paying more each year for labor per hour. The growth in implicit costs will naturally have an effect on workers’ wages or the number of workers hired.
This is just one piece of the puzzle, albeit an important one. So what should be done with anemic wage growth, and GDP that is crawling along at a snail’s pace? Some presidential candidates seem to think that higher minimum wages that have no correlation with productivity will fix everything, along with endless mandated benefits, higher taxes, more regulations, and the list goes on. But all of these things have happened to some degree over the past eight years, and they don’t seem to be working.
Some radical solutions coming up in Part II (later this week)…