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Where are the good jobs?

Rick McGahey: We won't see higher wages without two important policy changes

Rick McGahey | 4/6/2015, 8 a.m.
The American economy has added an average of 261,000 jobs every month for the past 12 months, with March's jobs ...
Fast food workers strike in New York City on Thursday, August 29, 2013, demanding a minimum of $15 an hour. Fast food workers in 50 cities across the U.S. are walking off the job Thursday as they protest for higher wages. CNN

— The American economy has added an average of 261,000 jobs every month for the past 12 months, with March's jobs report showing a slowdown to 126,000 jobs. Average hourly wages bumped up 7 cents in March, but have only grown by 2.1% in the last 12 months, a meager 52 cents per hour.

If job growth has been strong, why aren't wages going up?

Weak wage growth puzzles economists. After all, as the labor market improves, workers should be able to get raises as employers compete for a tighter labor force. But that isn't happening, for four reasons.

First, a lot of people still are out of work due to the persistent damage from the Great Recession and the weak economic recovery. Economists measure not only unemployment, but also "labor force participation" which includes not only workers and the unemployed, but also those looking actively for work.

In March the participation rate was 62.7%, and it hasn't grown even while there are more jobs and the unemployment rate is falling. We haven't seen a participation level this low since 1978. Put simply, many people have left the labor force and stopped looking for work, so there still are plenty of competitors for new jobs, which holds down wages.

Second, job creation is still slow. We are in a "jobless recovery." Job growth is distressingly low for this stage of the long recovery, now in its 69th month.

It took 6½ years. from January 2008 until May 2014, for the economy to just get back the jobs lost during the Great Recession and we are still lagging behind the normal post World-War II recovery pattern.

Slow job growth is costly for the unemployed and their families. It also slows overall growth, reducing the economy's potential growth, which further slows the economy, in a spiral of stagnation.

The Congressional Budget Office confirms this self-feeding slowdown. Its potential GDP estimate for 2017 has fallen by 7.3% since its estimate at the start of the recession, which translates into over $320 billion in lost economic activity.

The third reason for low wages is that jobs created in the recovery pay worse than the jobs we lost in the Great Recession. The recovery jobs are concentrated in retail sales, food services, cashiers, stock clerks, and maids and housekeepers -- all low-wage sectors.

When the United States is compared with other developed nations on percentage of low-wage jobs, we are sadly the winner. The Organization of Economic Cooperation and Development found that the United States has a higher percentage of low-wage jobs than South Korea, Ireland or Poland.

The fourth factor suppressing wage growth is the long-term failure to share productivity gains between workers and business. This recovery is not reversing that trend. According to the Economic Policy Institute, between 1948 and 1979, the gap between overall productivity growth and hourly compensation was 14.7%. But between 1979 and 2013, the gap ballooned to 56.9%, meaning much less of productivity growth found its way into paychecks. So we have economic growth, but workers aren't sharing in the gains.