Why is Compensation Growth So Low in a Time When Profitability is So High?

05 Nov. 2012 | Comments (0)

The Employment Cost Index for September was released this week. This measure gets a lot of attention as it is considered the best measure of trends in compensation growth. Compensation is comprised of wages, salaries and benefits.

Over the past 12 months, historically low compensation growth numbers have continued at 1.9%. This includes a 1.7% increase in wages and salary and 2.6% increase in benefits. Both are well below the typical growth rate in a time of economic expansion. In fact, the wages and salaries growth rate barely recovered from the lowest growth rate measured in the 1960s.

Almost three-and-a-half years after the end of the Great Recession, and with profitability reaching historical rates, why has compensation growth still not recovered? Here are a few potential explanations:

  1. 1) Past recessions also suffered from slow wage recovery. So long as the unemployment rate is above its normal levels, the labor market is a buyer’s market, and downward pressures on wage growth persist. This is especially reflected in the wages of new hires entering the labor force or re-entering after unemployment. As we’ve discussed in a recent blog, Is There a Talent Shortage in the U.S.? Start By Looking at Hours Worked, while there are talent shortages emerging in some specific occupations, there is no indication that these shortages are having a significant impact on wages.

  2. 2) Another reason for the slow growth rate in wages and salaries is the extremely weak growth of state and local governments. In the past two years, wage and salary growth for state and local government workers has been just above 1%.

  3. 3) The slow growth in benefits reflects both the weak labor market and an ongoing trend of slowing growth in healthcare benefits. In the past two years, healthcare benefits grew by an annual rate of 3%, versus 7% in the decade prior to the recession.

  4. 4) In 2010, there was a surge in the growth of total benefits, which reflected the re-institution of benefits that were taken away during the recession, such as 401K matching, but this surge has now subsided.

  5. 5) Inflation has been low in the past four years, reducing the need to compensate for increases in the cost of living.

What will happen to wage growth in 2013 and beyond?

The main factors impacting wage growth are signaling a continued trend of weak wage growth in 2013: The unemployment rate is still at a very high level, and with a still-gloomy economic forecast through the first half of 2013, it is unlikely to decline much. Corporate profits stopped growing – and for many companies even started declining in recent quarters – unleashing new efforts to cut costs. Inflation is likely to remain low in 2013.

Beyond 2103, wage growth is likely to accelerate as economic conditions improve and the ongoing retirement of baby boomers tightens the labor market.

Chart 1


Source: BLS

 

Chart 2


Source: BLS

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  • About the Author: Gad Levanon, Ph.D.

    Gad Levanon, Ph.D. Gad Levanon is director of macroeconomic research at The Conference Board, where he also leads the labor markets program. He also serves on The Demand Institute™ leadership team. Levanon create…

    Full Bio | More from Gad Levanon, Ph.D.

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