CEOs hunting for good employees should reconsider salary structure

man counting money
Stagnant wage growth is capping compensation. (Julia_Sudnitskaya/Getty)

While jobs are plentiful, another key component of the labor market isn’t: wages.

They just aren’t growing much and stagnant wage growth, no matter how robust the job market, means less buying power for individuals, which could eat into the economy’s continued recovery.

Real average hourly earnings rose just 0.1% from April to May on a seasonally adjusted basis, according to the U.S. Bureau of Labor Statistics’ latest available figures. The figure is based on a 0.3% increase in average hourly earnings, offset by a 0.2% increase in the Consumer Price Index.

CEOs may want to reconsider

That kind of flatness has been a hallmark of the recovery and means that CEOs and others, for all their grumbling about finding it hard to hire and retain workers, may want to reconsider their companies’ salary structures.

Average hourly earnings last year grew at their slowest pace since 2012, once inflation is taken into account, said Jay Shambaugh, director of The Hamilton Project at the Brookings Institution, to CNN Money.

Reasons The Hamilton Project cites for poor wage growth, or at least uneven wage growth, include the upper echelon of workers having seen their wages rise, while the middle and lower have not.

"For typical workers, you are not seeing much right now," said Shambaugh, who served on former President Obama's White House Council of Economic Advisers.

What's the cause?

Reasons this may be occurring, according to The New York Times, are:

  • A big decline in union membership. Unions benefit their members by fighting for wage growth. Average pay for workers represented by unions is generally higher than for those who aren’t.
  • Restrictions on contracts, including noncompete and no-poaching clauses, are becoming more common and thwart workers from quitting their jobs for better ones.
  • The federal minimum wage is $7.25 an hour, and has not been increased since 2009. Its purchasing power has never returned on a sustained basis to what it delivered in the 1960s and 1970s.
  • Technology and globalization are making it easier for companies to find cheaper alternatives to paying workers more. American manufacturing jobs started declining rapidly after 2000, as China became an exporting power.
  • Companies are increasingly outsourcing jobs once held by their employees. And wages for work performed by contractors is usually lower.

“A concerning trend is hiding underneath an otherwise booming period,” said Andrew Challenger, VP of Challenger, Gray & Christmas, in a statement. “Wages are not rising nearly as quickly as a tight labor market, strong economy, and high corporate profits would should indicate.”

It doesn't usually work this way

Historically, noted Challenger, wage stagnation happens when the economy is not growing, or is in decline, and the supply of labor is greater than the number of available jobs. The most recent example of this in the U.S. is during the Great Recession, which is a far cry from the state of the economy today.

Currently, unemployment is at an 18-year low, GDP is predicted to hit 2.9% growth and there are more jobs than workers to fill them.

Challenger has his own theories about what has changed in the U.S. economy to allow wage stagnation under such ideal conditions.

“It’s likely that the gig economy has something to do with this situation,” he said. “Yes, unemployment is down, but it may be lower because the market is saturated with people employed by companies like Uber and Postmates.”

And if wage stagnation becomes even more entrenched? “It can cause layoffs, as employers attempt to make up for the lost earnings from consumers being unable to purchase products,” because of their comparatively small paychecks, Challenger said.