Workers face paycheck pinch

After inflation, American workers earned 2.3 percent less than they did a year ago.

For all its strength, the current economic expansion is not boosting the American worker's paycheck.

Wages have been rising nominally: Average pay rose 8 cents last month to $16.27 an hour, according to a government report Friday. That's not fast enough to counter inflation.

By one common measure, average pay for an hour's work has less purchasing power than it had four years ago - when the current growth cycle began.

It's a pattern of weak wage growth that's now several years old, but the trend has worsened in recent months. Wages for the most recent quarter were 2.3 percent lower, after inflation, than workers received a year before.

While energy costs are the most obvious culprit, other forces may be playing a role, from globalization and illegal immigration to the weakening of labor unions. Politicians, too, could share in the blame.

Experts differ on just how wide and deep the problem runs. But the disturbing implications are clear enough. America's proud heritage as a land where the standard of living rises like late-summer corn seems, to many, to be at risk.

Even the fact that budgets have grown tighter for many debt-laden families is a volatile issue for the nation politically and financially. And economists say that while the pay pinch affects a wide swath of occupations, the impact is hardest on those without college degrees.

"It's two different worlds," skilled and unskilled, says John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "There's no way you can consider this one overall labor market."

Well-trained job seekers are in hot demand, he says. But the labor market is weak for those whose education ended in high school. In some cases, "weak" is an understatement.

The automotive industry, and the nation, got a shock a few weeks ago when Delphi Corp., a major auto-parts supplier, demanded that union workers take a gargantuan pay cut so the company can survive.

The airline industry, too, faces a period of intensive restructuring that is difficult for workers of all skill levels.

Pilots at Northwest Airlines last week approved a 24 percent temporary pay cut, to give the beleaguered airline breathing room while a new labor contract is negotiated.

In the grocery industry, the spread of Wal-Mart has had a similar pay-squeezing effect on some unionized supermarkets.

Nor is the challenge confined to the United States. Wage growth has been slowing in Europe and is tepid in Japan, as those regions work through a difficult restructuring of their economic base.

What these industrialized nations share is growing competition for lower wages, from factories in places like Portugal, Poland, and China.

US manufacturers have done remarkably well at responding to global competition by finding ways to make workers more productive.

Traditionally, rising productivity allows employers to raise wages without raising prices. Thus it holds the key to rising living standards in society.

But lately, wage growth has lagged behind fast-rising US productivity.

Several reasons, beyond the downward pressure of global competition, may be involved:

• The cost of benefits. Some employers have stopped offering health insurance, but those that do are spending more, and thus boosting overall compensation even though hourly wages aren't rising.

• Price-sensitive consumers. As energy costs rose, many companies didn't feel able to pass those costs along to customers. So they have to pay their oil bills by cutting costs elsewhere. Pay hikes get smaller.

• Government policies. Some researchers say a failure to crack down on illegal immigration - whether at the border or in the workplace - has depressed wages for the less skilled.

• Weak bargaining power. The decline of union membership in the private workforce has had a significant dampening effect on wages, some economists say.

"The auto and airline industry - these were some of the best jobs you could get," without a college degree, says Dean Baker, codirector of the Center for Economic and Policy Research in Washington. Those unionized jobs were "a boost to wages for less-educated workers generally, because to some extent other industries had to compete for those workers."

Other economists counter that a more flexible, less unionized labor market has helped the US trounce its European peers in job creation. Americans spend less time unemployed, but their incomes have arguably suffered as a result.

The result of all these forces is an environment in which wages tend to rise at a glacial pace. And when inflation picks up, that means they don't rise at all in real terms.

Inflation has now reached a 5 percent pace. The upshot is that hourly earnings are effectively 2.3 percent below last year's level.

"The inflation bar is very high right now," says Jared Bernstein of the Economic Policy Institute. So even the 2.7 percent hourly earnings growth, from a year earlier, "doesn't get you over."

Assessing just how far wages are falling behind inflation can be tricky. The federal government gathers data in several regular surveys, from the Census Bureau to the several sets of data produced by the Labor Department's Bureau of Labor Statistics (BLS).

The results can vary. The numbers above, for example, come from a widely cited wage report, a BLS survey of nonfarm employers called "current employment statistics."

In this survey, hourly wages for nonsupervisory workers rose by a total of just 4.6 percent during the 24-year period from 1979 to 2003, a recent Labor Department study found.

Most other reports show larger gains, in part because they track a wider sample of workers or of income. And clearly, Americans have found the means to consume higher levels of goods and services during that period.

"It's not as bad as it gets painted," says Diana Furchtgott-Roth, an economist at the Hudson Institute. By broader measures of household finances, she notes, "income is rising in real terms."

Still, on the issue of real pay for an hour's work, none of the government surveys show wages rising by even 1 percent a year between 1979 and 2003.

What's the recipe for keeping wages on an upward path? Some economists point to conservative models, such as keeping taxes and regulation low to spur job creation. Others take a more left-leaning tack, calling for stronger labor unions and a boost to the minimum wage.

Experts on both sides often stress education as paving the way for individuals to boost their earnings in higher-level work.

They also focus on two areas - healthcare and energy - where inflation is eating away at spending power. "You either need wages to pick up or inflation to slow down," says Mr. Bernstein. "There may be a bit of both in coming months."