One of the most troubling unresolved issues in modern economics is the continued lack of wage increases even as unemployment has dropped to under 5%. This is a worldwide phenomenon and appears to be linked to a number of intertangled factors, like the decline of unions and collective bargaining, the rise of freelancing and outsourced work, immigration, and automation.
Peter Cooper and Jonathan Soble wrote a very solid exposition on this seemingly intractable problem, and its costs on society [emphasis mine]:
Peter Cooper, Jonathan Soble | Global Economy’s Stubborn Reality: Plenty of Work, Not Enough Pay
Why wages are not rising faster amounts to a central economic puzzle.
Some economists argue that the world is still grappling with the hangover from the worst downturn since the Great Depression. Once growth gains momentum, employers will be forced to pay more to fill jobs.
But other economists assert that the weak growth in wages is an indicator of a new economic order in which working people are at the mercy of their employers. Unions have lost clout. Companies are relying on temporary and part-time workers while deploying robots and other forms of automation in ways that allow them to produce more without paying extra to human beings. Globalization has intensified competitive pressures, connecting factories in Asia and Latin America to customers in Europe and North America.
“Generally, people have very little leverage to get a good deal from their bosses, individually and collectively,” says Lawrence Mishel, president of the Economic Policy Institute, a labor-oriented research organization in Washington. “People who have a decent job are happy just to hold on to what they have.”
The reasons for the stagnation gripping wages vary from country to country, but the trend is broad.
When labor markets tighten, wages are expected to rise. But in recent years, as unemployment has fallen below 5 percent in the United States, wages have not been increasing as fast as in the past. Economists debate the reasons; workers grapple with the consequences.
In the United States, the jobless rate fell to 4.2 percent in September, less than half the 10 percent seen during the worst of the Great Recession. Still, for the average American worker, wages had risen by only 2.9 percent over the previous year. That was an improvement compared with recent months, but a decade ago, when the unemployment rate was higher, wages were growing at a rate of better than 4 percent a year.
In Britain, the unemployment rate ticked down to 4.3 percent in August, its lowest level since 1975. Yet wages had grown only 2.1 percent in the past year. That was below the rate of inflation, meaning workers’ costs were rising faster than their pay.
In Japan, weak wage growth is both a symptom of an economy dogged by worries, and a force that could keep the future lean, depriving workers of spending power.
In Norway, as in Germany, modest pay raises are a result of coordination between labor unions and employers to keep costs low to bolster industry. That has put pressure on Italy, Spain and other European nations to keep wages low so as not to lose orders.
But the trend also reflects an influx of dubious companies staffed by immigrants who receive wages well below prevailing rates, undermining union power.
This is one of the defining problems of our economic system, and finding a path through to another sustainable world is critical.