Minimum wage hikes not enough to boost broader US salaries

[WASHINGTON] Hikes in the minimum wage take effect this week in about 40 US states and municipalities but they will not be enough to boost US salaries more broadly, economists say.

Congress has not approved a federal minimum wage hike since 2009, and it was not indexed to inflation, so state and local governments stepped in to help workers on the lowest end of the pay scale make up some lost ground.

Washington state's minimum wage will rise to US$11.50 an hour, the highest in any state, while some are phasing in increases to get to a "living wage" of US$15, compared with the federal minimum of US$7.25.

In all, 18 states and nearly two dozen municipalities are raising their base salaries, but economists say the move affects a relatively small segment of the American labour force.

They say policies that could have a broader impact on wages include direct employment programmes, like infrastructure projects, especially in regions of the country that have not yet recovered from the recession.

An expanded earned-income tax credit which would boost earnings for higher-wage workers could also help, they say.

Other policies unrelated to wages include standardising state licensing criteria for professions like hair dressers. This would allow professionals to move to areas with more vibrant economies without having to pay to fulfill new licensing requirements.

Another more technical change would be to clamp down on the use of non-compete clauses which firms increasingly include in employment contracts. Such clauses keep workers from moving to competitors or starting their own businesses.

PERPLEXING

Even with the US economy in its eighth year of recovery, and with solid hiring pushing the unemployment rate to a 17-year low of 4.1 per cent, wage gains have been far more sluggish than economists and policymakers expected.

The gains have not been widely shared, either.

The US final employment report for 2017 released Friday showed average hourly earnings increased 2.5 per cent to US$25.63, just ahead of consumer price increases.

Nominal wage growth since late 2009 has been just above two per cent which is a little faster than inflation, but slower than the increases of more than three per cent in previous recoveries.

"That's the big open question... why haven't we seen more wage growth?" said Roberto Pinheiro, senior research economist at the Cleveland Federal Reserve Bank.

And recent gains have been marked by "rising inequality" with much of the growth "concentrated at the top," according to a study led by Jay Shambaugh at the Brookings Institution.

From 1979 to 2016, wages in the top fifth grew 27 per cent, compared to a gain of just 12 per cent in the next quintile, and a one per cent drop for the bottom group, the study shows.

Mr Pinheiro attributed the low wage growth mostly to slow improvement in labour productivity in the wake of the Great Recession that followed the 2008 financial crisis.

In other words, "firms are not getting more in output per hour from workers," so "the pie is not growing," he told AFP.

He and other economists agree there are many factors behind this, and as a result there is no easy solution.

Some of the slow wage gains are due to demographics in an aging American workforce: older, higher-paid workers are retiring - the so called baby boomers - replaced by younger, lower-paid "millennials," which drags down average wages.

Some areas, mostly near major cities, are booming, and companies say they had to boost wages and offer more attractive working conditions to fill open positions.

POLICY CHANGES

But Jared Bernstein of the Centre on Budget and Policy Priorities, who served as chief economic adviser to former Vice-President Joe Biden, noted the US economy still has "pockets of geographic weakness."

Those areas could benefit most from infrastructure projects to create jobs directly and help them catch up to more prosperous regions.

Mr Bernstein also said companies "have seriously gotten out of the habit" of raising wages, and executives have used holding down labour costs as a way to boost profits amid slow revenue growth.

Mr Shambaugh agreed, telling AFP firms will need to "retrain themselves to offer above-market wages to steal people because there isn't a deep bench."

The economists called for policies to address declining innovation, in part caused by increasing concentration of industries; and the erosion of workers' ability to negotiate higher pay, due to sharp declines in union membership, and the rise of non-compete clauses.

While the divisive current US political environment makes it hard to push such measures, Mr Shambaugh said one issue could have bipartisan support: keeping the economy firing on all cylinders, and even allowing inflation to rise until wage gains spread throughout the economy.

Most economists expect to see the unemployment rate fall much lower this year, and to see wages accelerate.

AFP