Posted on: Monday, May 31, 2004

Workers' share of economic recovery lowest in half a century

By Ameet Sachdev
Chicago Tribune

Despite an expanding economy and improved productivity in recent years, American workers are experiencing sluggish growth in wages.

Adjusted for inflation, many workers took home essentially the same pay last year as in 2001. Some wage increases aren't even keeping up with inflation.

This is an unusual period in American history.

Labor's share of the increase in national income since November 2001, the end of the last recession, is the lowest for any recovery since the end of World War II. That's the finding of a new study from the Center for Labor Market Studies at Northeastern University in Boston.

"Almost none of the productivity gains ended up in wages and salaries," said Andrew Sum, the center's director and lead author of the study. "Combine that with the fact that firms didn't add new workers to their payrolls, and that's what made this recovery so unique."

Sum and his researchers studied the aftermath of all nine recessions going back to 1950, and analyzed the distribution of national income, a measure of the economy similar to the gross domestic product.

From the start of 2002 to the end of 2003, national income grew about $804 billion, or 8.7 percent. For the first time, corporate profits received a larger share of the growth than labor did.

Labor compensation — wages, salaries, benefits and employer contributions to payroll taxes — made up about two-thirds of national income in 2000. Corporate profits captured 9.3 percent, the self-employed about 8 percent and the rest went to net interest, rental income and a combination of indirect business taxes and transfers.

In the first two years of past recoveries, labor received between 54.5 percent and 66.5 percent of the increase. This time, employees got 38.6 percent. Normally, corporate profits account for about 15 percent to 18 percent of national income growth. This time, corporate profits' share more than doubled, to 40.5 percent.

The reasons are not hard to spot.

Employment rolls have shrunk by 1.6 million jobs since the recession's start in March 2001. About one-quarter of those jobs were lost in the two-year period since the end of the recession.

Outsourcing, particularly the shifting of work to China and India, is one factor why hiring at home has been sparse. Companies are more focused on lowering costs to boost profit and recover ground lost in the stock market plunge that started in 2000.

When demand dictates adding workers, firms increasingly are turning to temporary and contract workers. Temporary workers are the fastest-growing segment of the workforce, according to the Bureau of Labor Statistics.

Companies also are extracting more work from existing workers.

Productivity rose 4.4 percent in 2003. But workers are not sharing much in its benefits.

Adjusted for inflation, average hourly wages for non-farm workers, excluding managers and executives, rose 25 cents, to $15.35, between 2001 and 2003. That equates to an annual increase of less than 2 percent, below the rate of inflation.

"Corporate profits, however, were able to experience explosive growth as a consequence of the very large gap between the growth rates of labor productivity and worker earnings," Sum wrote in the study.

The slack labor market has hurt people who held on to their jobs as well as the jobless, said Jared Bernstein, an economist with the Economic Policy Institute in Washington.

"What we learned in the '90s is if you want the benefits of economic growth to be broadly shared, you need a tight labor market," he said. "In the absence of a tight labor market, many workers lack the bargaining power they need to claim their piece of the pie."

Among full-time wage and salary workers, the news is worse. Median weekly earnings, adjusted for inflation, were $620 in 2003, the same as two years earlier, according to federal labor statistics.

Job survey after job survey highlights the issue.

Consultants Hewitt Associates, for example, found that the average salary increase in 2003 for overtime-exempt employees was 3.3 percent, the lowest in the consulting firm's 27 years of collecting this data.

Meanwhile, the median cash compensation for chief executives was up more than 7 percent, and that's not including stock options and other long-term incentives, according to Mercer Human Resource Consulting.