Profits don't flow through to wages

Paul Davidson and John Waggoner, USA TODAY | USATODAY

Stock markets and corporate profits are breaking records. The economy suddenly looks brighter after the government's surprising report Friday that employers added 635,000 jobs the past three months.

But instead of celebrating, many working Americans are borrowing a line from the 1996 movie Jerry Maguire: "Show me the money."

Hourly wages ticked up 4 cents in April to an average $23.87, rising at about the same tepid 2% annual pace since the recovery began in mid-2009.

But taking inflation into account, they're virtually flat. Workers who rely on paychecks for their income have been running in place, financially speaking. Adjusting for inflation, an average worker who was paid $49,650 at the end of 2009 is making about $545 less now — and that's before taxes and deductions.

Stagnant wages aren't only tough on workers — the American economy is paying a price, too. Living standards aren't rising. Consumer spending, which is 70% of the economy, is more restrained. And the recovery advances at a slower pace.

"Ultimately, for the economy to thrive we need everyone participating," says Mark Zandi, chief economist of Moody's Analytics.

The profits of Standard & Poor's 500 corporations hit a record in the first quarter. Their healthy earnings have boosted stocks, and April's encouraging jobs report propelled the stock market even higher Friday. The blue-chip Dow Jones industrial average crossed 15,000 for the first time and closed at a record 14,973.96, up 142.38 points.

The roaring market is making the richest Americans richer, and giving them more money to spend. But in 2010, only 31% of U.S. households had stock holdings of $10,000 or more, according to the Economic Policy Institute (EPI). During the first two years of the recovery, average net worth rose for the top 7% of households but fell for the other 93%, the Pew Research Center says.

Meanwhile, Corporate America isn't sharing their record earnings with their own employees.

"Don't hold your breath," for employers to become more generous, says John Lonski, chief economist for Moody's Investors Service. One reason, he says, is that revenue growth has been meager, up between 0.5% and 1% in the last year.

In fact, higher profits owe partially to employers' success in controlling labor expenses, by holding down raises and hiring conservatively.

Productivity, or output per labor hour, has risen an average 1.5% a year since the recovery began. Companies are squeezing more out of each worker even as inflation-adjusted wages have stagnated.

Another reason for stagnant wages is the law of supply and demand. Sure, the job market has picked up. Employers added 165,000 jobs last month and an average 196,000 a month this year, up from 183,000 in 2012. And the unemployment rate has fallen from a peak of 10% in 2009.

But today's 7.5% jobless rate is still high. Nearly 12 million Americans are unemployed, and millions more want to work but are so discouraged they've stopped looking. With an abundant supply of potential workers, employers have little reason to shell out big raises.

"High unemployment hurts workers' bargaining power," EPI economist Heidi Shierholz says. "Employers know they can go get someone else."

So many Americans are out of work that employers could get away with giving no raises at all, Zandi says, leaving household income falling behind inflation. Employers, however, realize that would hurt morale and, in turn, productivity, he says.

Still, wage increases that just barely keep up with inflation don't make for a prosperous economy.

"We're not seeing the the living standard growth of American workers that we should be seeing," Shierholz says.

Stagnant wages also hurt consumer spending. Low- and moderate-income workers typically spend nearly all of their paychecks, juicing the economy, while high-income workers tend to save a significant portion, says Dean Baker, co-director of the Center for Economic and Policy Research.

Larry Breech, of Milville, Pa., a retired farmer who makes about $10,000 a year, says his per diem pay for substitute teaching hasn't changed in several years.

"We will be frugal," he says. "Fiscal restraint is imperative."

Consumer spending, which has been growing at an average annual rate of about 2% during the recovery, would be rising by 2.5% if employers simply passed their productivity gains onto their workers, Zandi says.

Some workers are getting bigger raises. While the lowest 10% of income earners got average raises of 0.3% last year, those in the top 25% saw their pay jump 3.1%, according to the Bureau of Labor Statistics and Moody's Analytics. Workers with higher skills and more education in booming industries, such as energy and technology, can command higher salaries.

Stephen Allen, an oil industry contractor in St. Louis, says his wages have increased by more than 60% the past three years. He makes about $85,000 a year.

For now, it's up to Americans like Allen and those with large stock holdings to generate a bigger share of spending and economic activity. The top 20% of households based on income account for nearly half of consumer spending, according to Barclays Capital.

A bright spot is that despite puny wage increases, other barometers of household finances show improvement. The housing market is continuing a solid recovery. Climbing home and stock prices have helped households overall recover the wealth they lost in the recession and housing crash.

And the share of income that Americans are using to pay off debt has fallen to 10.4%, the lowest level since the government began tracking the data in 1980, according to the Federal Reserve. Meanwhile, falling gasoline prices are putting more cash in consumers' pockets. Such developments can partly offset sluggish wage growth and pave the way for higher spending.

After working off debt the past three years, Allen says he expects to be debt-free this summer "and then save for a down payment on a house."

Still, economists say consumer spending won't take off in earnest until inflation-adjusted wages return to a normal growth rate of about 1.5% a year. Baker says that likely won't happen until unemployment falls below 6%, probably in 2016.

Then, employers will begin to worry about not finding enough workers.

"They'll start to hire more aggressively," pushing up wages faster, Zandi says.