What’s Up with the Slow Growth in Workers’ Pay?
Posted 2/14/2007 1:18 AM ET
By Barbara Hagenbaugh, USA TODAY
WASHINGTON — When Federal Reserve Chairman Ben Bernanke testifies on
Capitol Hill Wednesday and Thursday he will likely be peppered with questions
about why wages are not rising at a more rapid pace.
But he may have to leave lawmakers guessing.
That's because economists aren't sure why wages haven't increased at a faster
pace even though the labor market is tight. A tight labor market is often a
precursor to a big pickup in pay as employers enter into bidding wars to attract
and retain workers.
Adjusted for inflation, average hourly earnings for non-supervisory workers rose
1.7% in December from a year earlier, according to the government. While
earnings rose five consecutive months through December and are rising at the
fastest rate in years, economists say they aren't sure why the gains haven't been
larger given the jobless rate, at 4.5% in December, is near a five-year low.
"It has been curious in this cycle why wage growth has lagged," ClearView
Economics head Ken Mayland says.
Bernanke likely will be asked about the slow growth in workers' wages when he
delivers his twice-yearly testimony on the economy to lawmakers. A number of
Democrats, including Senate Banking Committee Chairman Chris Dodd, D-
Conn., have promised to make workers' wages, particularly the divide between
the haves and the have-nots, a focus of the hearings. Bernanke is scheduled to
testify to the Senate today and to the House on Thursday.
Two theories why wages haven't risen faster:
•Globalization. Technological innovation and increased trade have meant jobs
that used to only be able to be performed in the USA can now be done abroad.
Page 1 of 6
That means that for many professions, a low jobless rate in the USA may not
result in higher wages if there is surplus of available workers worldwide.
"A large portion of Americans have a job, but that's not true in the rest of the
world," OppenheimerFunds chief economist Jerry Webman says.
•Benefits. Big increases in the cost of benefits, particularly for health care, have
given employers less money to increase wages. Benefits account for 30% of total
compensation given to workers, according to the Labor Department.
Employer costs for health insurance premiums rose 7.7% in 2006, according to
the Kaiser Family Foundation. Although that was the smallest gain since 1999, it
was still far larger than the overall inflation rate.
Health care costs are factored into what employers view as workers' total
compensation, which has risen. But that's little consolation for employees who
have seen only paltry raises in recent years, Mayland says.
Questioning Bernanke about the slow wage growth and divide between rich and
poor is likely barking up the wrong tree, argue some economists, including First
Trust Advisors chief economist Brian Wesbury.
"Productivity, not the Fed, determines the sustainable trend for real wages,"
Lehman Bros. chief U.S. economist Ethan Harris said in a recent note to clients.
Page 2 of 6
December 26, 2006
Today’s Debate: Executive Pay
Wall Street's big holiday gifts
hint at nation's wealth gap
When bonuses reach $50 million, something is badly off-track.
For workers lucky to get a turkey as a Christmas bonus, the year-end payouts to
top Wall Street executives must seem unimaginable.
Earlier this month, Morgan Stanley CEO John Mack took home $40 million, a
record bonus for a single year's performance. Days later, his record was
smashed by the $53.4 million payout to Goldman Sach's Lloyd Blankfein.
If executive pay as a whole has reached insane levels, at major securities firms it
is insanity on steroids. The payouts to Mack and Blankfein are part of $24 billion
in bonuses New York's comptroller expects will be paid by securities firms this
year, thanks to surging 2006 profits.
Some might see it as Scrooge-like to begrudge big bonuses in such a bountiful
year. But the whopping payouts underscore something of greater social
importance: the nation's growing disparities in wealth. The top 10% of income
earners in the USA own 70% of the wealth, according to a Federal Reserve
study. And while hourly wages are forecast to increase about 3.5% this year,
Wall Street bonuses are expected to jump 15% from last year. These trends are
a recipe for resentment and class conflict.
To be sure, senior Wall Street executives are highly skilled workers and deserve
hefty pay. Yet the surge in profits on Wall Street is the result of global economic
forces — rising markets and a wave of corporate mergers — that these fortunate
executives did not create and can't claim credit for.
If the rationale is their expertise, do they deserve to profit from events beyond
their control any more than unskilled workers? And should they be able to do this
at the expense of, and with little input from, shareholders in their companies?
These payouts are also hard to justify on the basis of retaining top talent. At
Goldman Sachs, they might actually be driving people away. After all, when
Page 3 of 6
you're fabulously wealthy, why stay? Blankfein's two immediate predecessors,
Treasury Secretary Henry Paulson and New Jersey Gov. Jon Corzine, left and
took the enormous pay cuts associated with public service.
At Mack's company, some of the biggest paychecks have been to get rid of
people. His predecessor was paid $113 million to leave after fomenting a state of
near insurrection in the ranks.
Defenders of Wall Street's pay packages say they are actually quite reasonable
in the context of the fortunes made by hedge fund managers, Silicon Valley
entrepreneurs, entertainers and athletes.
That argument illustrates the problem. Advancing technology and mass media
have created an environment in which vast fortunes can be made in a virtual
blink of an eye. So be it. That is to be expected, perhaps even encouraged, in the
name of capitalism.
But the Wall Streeters don't put their own capital at risk. They haven't devised
hugely innovative products such as Google or YouTube. People don't buy tickets
to see them perform. Yet they look to the people who do these things as
For those on Wall Street who feel envious or left behind, we offer this advice: Go
start your own company, or else take up acting.
Page 4 of 6
Well-paid CEOs enrich U.S.
By James K. Glassman
Politicians are in a tizzy over how much corporate leaders make — about $8
million this year for CEOs of S&P 500 companies, according to the Financial
Times. Rep. Barney Frank, D-Mass., has even introduced a bill titled "The
Protection Against Executive Compensation Abuse Act."
Yes, CEO pay — including the record bonuses paid this year to heads of Wall
Street firms such as Morgan Stanley and Goldman Sachs — is attention-
grabbing and has increased sixfold over the past 25 years.
But, as economists Xavier Gabaix of MIT and Augustin Landier of NYU
concluded in a study in July, that increase "can be fully attributed to the sixfold
increase in market capitalization of large U.S. companies during that period."
CEOs get paid more because they run bigger, more valuable companies.
Critics, notably Lucian Bebchuk of Harvard, argue that corporate boards are held
captive by CEOs, who essentially dictate their own pay. Actually, though, rising
pay has coincided with a trend toward more powerful and independent boards.
Kevin J. Murphy and Jan Zabojnik of the University of Southern California offer a
more sensible explanation: Our new global high-tech economy, companies are
less likely to promote insiders who may be chummy with the board and instead
pick CEOs outside not just the firm but even the sector — take Alan Mulally, who
came to Ford from Boeing.
These talented generalists are scarce and can have a huge effect on profits.
Sure, they command high pay. Too high? The Yankees' Alex Rodriguez earned
$29 million from June 2005 to this summer. Jeff Immelt of General Electric
makes less than Dr. Phil does. If a good CEO can boost profits by $200 million,
he's easily worth $10 million, or more.
Certainly, some CEOs, like some ballplayers, make more than they deserve.
Angry shareholders have a remedy — dump the stock. The bigger problem, as
we show in The American, the magazine I edit, is that publicly traded companies
— because of pressure from politicians, the media and unions — could be
underpaying CEOs. The best and brightest managers are migrating to private-
equity firms, hedge funds and privately owned businesses out of the spotlight.
Page 5 of 6
With 5% of the world's population, the USA is home to half the world's largest
companies. Our system of compensating CEOs has served the nation well. Let's
not let politicians mangle it.
James K. Glassman is a senior fellow at the American Enterprise Institute and
editor-in-chief of The American magazine.
Page 6 of 6