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Falling wages threaten US economy

Ninety-one percent of people in the US labour force have a job. That may be the extent of the good news for these Americans, whose incomes tell a darker story.

business Updated: Oct 04, 2011 21:20 IST
Nicolas Brulliard, The Washington Post
Nicolas Brulliard, The Washington Post

Ninety-one percent of people in the US labour force have a job. That may be the extent of the good news for these Americans, whose incomes tell a darker story.

Take-home pay, adjusted for prices, fell 0.3% in August, the third decrease in five months, and personal income dropped for the first time in two years, the commerce department reported last week. The declines followed news from the census bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1%, a 17-year high.

Salary and benefit growth "has been going nowhere," said Mark Zandi, chief economist at Moody's Analytics Inc. "One of the key reasons the recovery has stalled is that real incomes have fallen."

While policy makers from Federal Reserve chairman Ben Bernanke to President Barack Obama focus on cutting unemployment stuck near or above 9% since April 2009, the widespread stagnation in wages may offer a better explanation for the failure of economic growth to accelerate two years after the end of the recession. Workers' ability to negotiate higher earnings won't return until the job market strengthens, and flagging confidence has raised the risk that consumers may retrench.

Inflation-adjusted weekly earnings have fallen for six consecutive months, dropping 1.8% in August from a year earlier, a pace not seen since the 18-month economic slump ended in June 2009.

"Those who are employed are worried about their income and are seeing real purchasing power get squeezed, therefore they're set to retrench a bit," said Julia Coronado, chief economist at BNP Paribas, who has served on the Fed board's forecasting team.

Companies said they have flexibility to hold down employee earnings, given uncertain demand and an excess supply of labour. Retailers such as Kohl's report that elevated food and fuel prices have cut into paychecks, restraining shoppers. "The biggest issue is that labour income is soft at a time when we're getting no offset" said Michael Feroli, chief US economist at JPMorgan. Unlike in the early part of the recovery, stock-market losses are eroding wealth and home prices continue to decline.

Support from the government may shrink if Congress fails to extend payroll-tax cuts and unemployment benefits set to expire at the end of the year, and limited access to borrowing means Americans have few means to fund their purchases, said Feroli.

(In exclusive partnership with The Washington Post)

First Published: Oct 04, 2011 21:19 IST

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