For the first time in 14 years, the American workforce has in effect gotten an
across-the-board pay cut.
The growth in wages in 2004 and the first two months of this year trailed inflation,
compounding the squeeze from higher housing, energy and other costs.
The result is that people like Victor Romero are finding themselves falling
The 49-year-old film-set laborer had to ditch his $1,100-a-month Hollywood
apartment because his rent kept rising while his pay of $24.50 an hour stayed
"There's no such thing as raises anymore," Romero said.
This is the first time that salaries have increased more slowly than prices
since the 1990-91 recession. Though salary growth has been relatively sluggish
since the 2001 downturn, inflation also had stayed relatively subdued until
last year, when the consumer price index rose 2.7%. But wages rose only 2.5%.
The effective 0.2-percentage-point erosion in workers' living standards occurred
while the economy expanded at a healthy 4%, better than the 3% historical average.
Meanwhile, corporate profits hit record highs as companies got more productivity
out of workers while keeping pay increases down.
Some see climbing profits and stagnant wages as not only unfair but also ultimately
unsustainable. "Those that are baking the larger pie ought to see their
slices expanding," said Jared Bernstein, an economist with the liberal
Economic Policy Institute in Washington.
But higher wages could hurt the economy by stoking inflation further. Employers
might pass the costs on to consumers in higher prices, and that in turn might
prompt the Federal Reserve to raise interest rates more aggressively, possibly
slowing the recovery or even triggering a recession.
For now, workers' wallets are being pummeled by something of a perfect storm
of economic forces: a weak job market, rising health insurance premiums and
other inflationary pressures.
The biggest factor is the slack employment market, which means there is little
pressure on businesses to boost pay. "They take advantage of you because
there's no work and anyone will work for anything," Romero said.
Although the unemployment rate has dropped to a relatively low 5.2%, that figure
doesn't count the hundreds of thousands of jobless people who've given up their
searches and dropped out of the labor market at a greater rate than anytime
since 1988. At the same time, the cost of health premiums has skyrocketed, eating
into the pool of corporate cash set aside for raises. Although pay rose only
about 2.4% last year, benefit costs jumped almost 7%.
With benefits factored in, workers' total compensation did outpace inflation
in 2004, even if they didn't see it in their paychecks. But employers also are
requiring workers to pay a greater share of their premiums.
"Healthcare has eroded the wage base," said Janemarie Mulvey, chief
economist with the Employment Policy Foundation, a business-funded think tank
"In the long run, we can't continue like this. If healthcare keeps crowding
out wages forever, something's got to give."
The squeeze is especially intense on the 47% of the workforce whose employers
don't directly provide their health insurance. For lower-income workers, who
are more likely to be uninsured, the falling value of their wages is even more
serious because they're more likely to live paycheck to paycheck. And rising
food and energy prices take a proportionately higher toll on the poor than on
Historically, periods when wage growth is outpaced by inflation rarely last
more than 18 months. That's partly because businesses don't want their employees'
living standards to fall, as that injures morale, said Trewman Bewley, a Yale
University economist who has studied wage activity during economic downturns.
Many economists figure it's only a matter of time until workers can pry more
money out of their employers to catch up to inflation again. If economic growth
remains robust, as many forecasters predict, workers may gain greater leverage
to negotiate wage hikes.
"Chances are that those workers that have problems getting by because
of higher fuel prices will probably tell their employers, 'I can't make it,'
" said John Lonski, chief economist at Moody's Investors Service.
That hasn't played out for Brian Chartier. The 29-year-old Glendale resident
handles inventory for a Los Angeles manufacturing company. No one there, he
said, has gotten a raise in two years.
"They're able to do this and I haven't quit, because where am I going
to go?" he said. "There are no jobs."
While his salary remained flat, rising healthcare premiums kept eating up more
and more of Chartier's take-home pay, so he dropped out of his employer's insurance
program. His rent is also climbing.
As Chartier loaded bags of groceries into his Honda Civic last week, he boasted
that they were full of bargains. "I don't get a single thing that's not
on sale," Chartier said. "I can't afford to anymore."
Despite the failure of their wages to keep pace with inflation, American consumers
have kept shopping. Consumer spending has continued to rise. Analysts say that's
partly because some shoppers are thinking less about their paychecks and more
about their biggest asset: their homes.
Home prices rose 21.1% in Southern California and 9% nationwide from February
2004 to February 2005, sheltering consumers, and the economy, from much of the
pinch of higher prices.
"There's been a wealth effect afoot throughout much of the recession and
the recovery," said Bernstein of the Economic Policy Institute, "because
no matter what people's incomes were doing, their wealth was improving —
their biggest assets, their homes, were accruing."
As inflation sparks higher interest rates, most economists expect the housing
market to cool, making shoppers more dependent on their paychecks. And even
those who have seen their paper wealth rise phenomenally aren't happy about
rising costs and stagnant pay.
Corina Swatz has seen the value of her Silver Lake home triple in about a decade.
But neither she nor her husband has gotten a raise in more than a year. Meanwhile,
gas prices have forced them to shell out $55 to fill the tank of their Chevy
"I used to spend $600 a month [on groceries]. Now I spend $800,"
Swatz, a mother of two, said as she made her weekly Costco run last week. The
increased value of her home gives her only so much solace. "We're hanging
The danger is that people like Swatz, despite their home equity cushion, may
pull the rug out from under the economic expansion by reining in their spending.
That's what Gabriel Torres has done. The 56-year-old cook, who lives in Hollywood,
hasn't gotten a raise in years but pays ever-higher prices to fill his Nissan
Xterra. He and his wife have come up with a solution: Cut down on driving.
"We don't go out much," Torres said. "We used to. But now we
only drive when we really have to."