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Unemployment down -- but so are wages

The dip in unemployment and job claims indicate optimism -- but wages fell sharply for the majority of American workers last year in a way that they haven't since 2006.

Wall Street saw markets tick upward today on the news that jobless claims fell, supporting the idea that unemployment appears to be steadily dropping. With these signs, it’s easy to believe the economy is doing better.

But if you look at wages, the picture is not nearly as optimistic. Workers’ real hourly wages dropped more last year than at any time since 2007. That includes the economically stagnant years of the Great Recession -- 2008, 2009, and 2010.

We found this surprising fact in a February 17 report on wages from the Bureau of Labor Statistics, or BLS (If you missed it, don’t feel bad; it was buried between the thrillingly titled “The Producer Price Index for Finished Goods Advances .1% and Finished Core Increases .4%” and “CPI All Items Rises 2% in January, With Modest Increases in Food and Energy”).

The report showed that real hourly wages in the private sector declined 1% from January 2011 to January 2012.  That is adjusted for inflation -- a very important concept, as it turns out, for measuring wages. Inflation measures rising prices. So, although paychecks actually crept up, households are 1 percent poorer today than one year ago in terms of what they can buy.

But for the vast majority of American workers, the news gets even worse. 

Their wages fell 1.7 percent, or in other words 70 percent more than private sector workers’ as a whole. This group, “non-supervisory and production employees,” accounts for 80 percent of workers. That includes anyone who’s not a boss and anyone who works in manufacturing. 

So wages are falling along with unemployment, which dropped noticeably, to 8.3 percent from 9 percent, over the same span of a year.

What explains this? Christopher J. Flinn, a professor of economics at New York University, thinks businesses are capitulating to the idea that it’s going to take longer than they expected for the economy to bounce back. They’re compensating for their lower expectations by keeping a tight rein on payrolls.

“Employers are tightening up on raises and hiring and it’s probably going to persist for the next few years,” Flinn says.

In 2009 and 2010, he argues, employers might have thought that we were simply in a rough patch that would soon be cleared. In order to negotiate those difficult times, businesses cut back on the number of workers but, notably, kept pay increases in line with previous years.

Flinn suspects that perceptions changed last year; companies now believe the job market may not return to the way it was before the Great Recession. With more people chasing fewer jobs, workers’ wages are taking one on the chin.

If Flinn’s theory is correct, households are going to have to learn to make do with lower wages. That could mean either further cost-cutting, which would hurt consumer spending, or a renewed increase in the use of credit, which would increase household debt burdens at a time when they’re most looking to reduce it.

Either way, it illustrates that despite the recent improvement in unemployment figures, the job market will not entirely rebound until wages move up.

About the author

Karl Baker joined Marketplace in January of 2012. Before coming to New York, he worked as a commercial fisherman, an English teacher, and a part-time reporter for KBCS radio. He's also currently a student in business and economic reporting at NYU.

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