Why Jobs Are Recovering But Pay Isn't

Getting a raise will take a lot more than it used to.

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There's finally some good news about jobs. The economy is creating more than 200,000 new jobs per month, which, if it continues, is enough to gradually lower the unemployment rate and strengthen the economic recovery. That will make workers feel better about their job security and revive confidence, which nose-dived during the recent recession.

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But there's some bad news about jobs, too: Many of them don't pay as much as they used to. The recession that officially ended in 2009 zapped about eight million jobs, and overall there are still about 14 million unemployed Americans. A surplus of workers in many fields is likely to keep pay flat for awhile. And in some industries, deeper changes like aggressive offshoring or the replacement of workers with new technology could depress wages indefinitely. Government data shows that average weekly earnings have crept up by about 6.6 percent since the end of 2007, when the recession began. But after inflation, the increase is just 1.4 percent. And that's only for people who have jobs, since the unemployed aren't counted in data measuring the size of the typical paycheck.

Stagnant pay, in fact, is becoming one of the most pernicious long-term problems in the U.S. economy. Even before the recession, median household income had hit a plateau, barely changing, after inflation, between 2000 and 2008. Then it fell by about 5 percent during the recession, as many families went from two wage-earners to one, or subsisted on unemployment insurance and other types of aid. So while some individual workers are doing okay, a lot of families dependent on income from more than one source are feeling a pinch. It doesn't help that prices for food, gas, healthcare, and education are rising faster than overall inflation, putting greater strain on families who are overly dependent on those necessities.

Usually, a recovering economy pushes pay back up, as slack in the labor market tightens and companies ramp up hiring, paying more if that's what it takes to get needed workers. But that may not happen anytime soon, leaving many families with income that fails to keep up with inflation. Here are five reasons to expect stagnant incomes in coming years:

Companies don't need that many workers. Many companies made a startling discovery during the recession: They can be profitable with far fewer employees. As many workers rightly suspect, that's partly because whip-cracking bosses demand that their harried staffers do—all together now—more with less. But technology helps, too, since computers, networks, and Web-based services make workers more efficient. Nobody walks to a shelf and pulls off a fat directory to look up a phone number anymore; it's all there on the Internet, accessible in seconds.

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In the 1980s, companies laid off workers when a recession hit, then hired most of them back when it was over. That pattern has changed. Technology is evolving so rapidly these days that it can transform a company in the space of a year or less, which means many companies no longer need the workers they laid off during the recession. Or they may need different workers, who have different skills. From an employee's perspective, it might seem like a smaller payroll ought to make every remaining worker worth more. But that's not usually how it works. When the demand for workers goes down and the supply goes up, the price that companies are willing to pay—your wage or salary—goes down.

Too many workers have the wrong skills. Technology is changing faster than ever, and skills that were valued just a few years ago may be in oversupply today. Construction is a good example. During the housing boom, strong demand for experienced construction workers drove wages up and probably led many such workers to figure there was no need to learn anything else. But the construction industry has lost nearly two million jobs since the recession began, with no rebound in hiring evident yet. Pay, not surprisingly, has drifted down over the last two years, and could fall further, since the pressure on builders to shave costs and cut prices is intense. So anybody in this field expecting to earn the same pay with the same skills they had five or 10 years ago is probably not being realistic.

[See why the middle-aged are missing out on new jobs.]

The same trends apply to white-collar fields like marketing, programming, IT, and even healthcare. Consulting firms like McKinsey and Accenture have pointed out that the workers who are in highest demand—and therefore able to command the highest pay—tend to have a combination of skill sets that keeps them ahead of the competition. Companies are increasingly hiring people adept at things like data mining, social media, and global supply-chain management—especially if they can handle more traditional responsibilities as well. Proving you can manage complex organizations is another plus. The catch is, it can take months or years to learn the latest skills, once you figure out what they are. And many people resist that kind of change in the first place. So while strivers continually updating their skills and learning the latest technology will continue to enjoy nice raises, many others who lack the energy or foresight to keep up to date will stagnate.

High-paying jobs aren't coming back so fast. A recent study by the National Employment Law Project, a nonprofit group that studies labor trends, found that many of the new jobs being created are in low-paying industries, while there are few new jobs in higher-paying industries. The biggest job gains over the last year, for example, have been in administrative and support services, but median pay is just $12.91 per hour, which is near the bottom among the 23 industries NELP analyzed. Other low-paying fields where jobs are returning include restaurants, retail, social assistance, and nursing homes, all of which offer median pay of less than $13 per hour. Higher-paying industries like utilities, finance, insurance, information services, and construction, where pay averages $19 an hour or more, are still losing jobs. There are a few exceptions to the trend, but it makes sense that employers skittish about the strength of the economy would test the waters by hiring cheaper workers first, while holding off on costlier ones.

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Fewer middle-aged men are working. One stark change in the workplace has been a sharp decline in the percentage of middle-aged men who are working. In 1970, 80 percent of men aged 25 to 64 had a job, according to a recent study by the Brookings Institution. Today it's just 66 percent. Part of the reason for the shift is the increasing role of women in the workplace. But men also tend to hold more jobs in beleaguered industries like construction and manufacturing, while women are more likely to work in recession-resistant fields like healthcare and education. Since men still earn more than women (for better or worse), the drop in the percentage of men with jobs is putting downward pressure on family income. Brookings points out that while the median income for men has been flat over the last four decades, at about $48,000 after inflation, it would be about 28 percent lower if the percentage of men working had stayed the same. That's a tacit but very real drop in family incomes that seems unlikely to change.

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Homeowners can't move. Labor markets naturally adjust themselves over time as people in depressed areas seek work in places where there are more jobs and they can earn more. The problem now is that the housing bust and sharp drop in home values have left many homeowners underwater on their mortgages and unable to move without taking a prohibitively large loss on their house. So some people who might ordinarily move to where there are better opportunities are stuck in place, and captive to a weak local economy. Someday those home values will improve, and people will have more freedom to move. But when they do, they'll still need skills employers are willing to pay for. And waiting for things to get better won't be one of them.

Twitter: @rickjnewman