Why Raises Are So Scarce

Practically nobody gets a pay hike anymore just for showing up.

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Most Americans could use a nice raise. Maybe next year.

For 2010, companies on average are increasing their payroll budgets by 2.5 percent, according to an annual study by the Conference Board. That's higher than last year, but otherwise it represents the weakest growth in raises since the research group started tracking such data in 1989.

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That may not sound surprising in an economy with 9.5 percent unemployment, but there's another finding that confirms a Darwinian workplace trend many may have suspected: As tiny as raises are, only the most productive workers are getting them. At 313 companies the Conference Board surveyed, virtually all of the money set aside to reward workers is going toward merit raises, with no companies giving out raises simply to boost morale, cover cost-of-living increases, or reward workers for showing up. That's new. "Companies are saying we're not going to raise pay just to raise pay," says Conference Board researcher Christopher Woock, who co-authored the report. That suggests a growing disparity among those lucky enough to be employed, with high-performers getting above-average raises while the mediocre get nothing. And anybody below mediocre has probably been laid off.

Average raises will stay slightly ahead of inflation, forecast to be a mere 1.5 percent or so this year. But the pressure on family budgets is obviously intensifying. In another survey, by the Pew Research Center, 55 percent of respondents said they've endured some sort or hardship that has cut their income: either a spell of unemployment, an outright pay cut, a loss of work hours, or a downgrade from full-time to part-time status. That helps explain why consumer gloom is so pervasive that it threatens to torpedo the recovery we're supposedly in: Many workers who still have jobs and aren't counted as unemployed have nonetheless lost income that threatens their quality of life. And they're not sure how to get it back.

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As many families know, the income rut pre-dates the recession. From 2000 to 2008, median household income after inflation was essentially stagnant, meaning the typical family had a harder time saving and getting ahead. Anybody who required a lot of healthcare or had kids in college—two parts of the family budget where costs are rising most rapidly—very likely fell behind. And once the data from the recession is tallied, it will probably show a 5 to 7 percent decline in real incomes for the last couple of years, which would be the biggest quality of life degradation in decades.

Many consumers have responded by adopting the "new frugality"—saving more and spending less, or at least telling survey conductors they plan to do that—but even if it sticks, frugality won't raise living standards or keep the economy humming. To do that we need motivated workers and companies able to innovate and create value that didn't exist before.

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To some extent, American wages have flatlined thanks to globalization, cheap overseas labor, and technology revolutions like the Internet. But many Americans have also dug themselves into a hole, by failing to gain the right skills for a turbulent, information-based economy or protect themselves against changes that are inevitable. That makes the finding on merit pay quite trenchant—and perhaps permanent. With an oversupply of labor, companies no longer have to offer raises to maintain stability and keep workers from bolting. They only need to offer raises to workers with unique skills who would be hard to replace. That mismatch between labor supply and demand should persist for years, with most economists forecasting high unemployment through at least 2013. As for keeping up morale, well, we all know the mantra: You should consider yourself lucky to have a job. That counts as a morale-booster these days.

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For silver-lining seekers, 2011 looks slightly better than 2010, with companies saying they plan to increase their raise pools by 3 percent. That's inching closer to a level that represents a real gain for a meaningful number of workers. And in the Pew survey, 62 percent of respondents said they expect their personal finances to improve in the coming year. Maybe we're learning to prosper without raises. It wouldn't be a bad skill to have.