U.S. Jobs Paradox: Shouldn’t Pay Rise as Unemployment Falls?

Unemployment rates have fallen to near full-employment levels, but American workers are not getting a boost to their paychecks. Additionally, American workers are finding they have continually less bargaining power across the United States. Employers, thanks to at will employment laws and an increasing supply of educated labor, are finding it easier to fire “troublemakers” who demand raises, better working conditions, or other incentives to stay happy and productive.

Unemployment rates have fallen to near full-employment levels, but American workers are not getting a boost to their paychecks. Additionally, American workers are finding they have continually less bargaining power across the United States. Employers, thanks to at will employment laws and an increasing supply of educated labor, are finding it easier to fire “troublemakers” who demand raises, better working conditions, or other incentives to stay happy and productive.

The shift towards a more dynamic workforce has also translated into fewer worker protections and lower union participation rates. After peaking at around 33% of wage and salary workers in the 1950s, union membership has continued to decline for several generations. Total employed workers in unions now account for just 11% of the total workforce, with further declines expected. Union membership in the private sector has fallen even further, down to 6.6% in 2014 and expected to fall to less than 6% by the end of the decade.

Some economists argue the decline of labor membership is the result of a growing disparity between unemployment rates, wages, and hours worked. Historically, a fall in unemployment rates would cause wages and hours worked to rise. Recently, however, that has become increasingly not the case.

In the just-released jobs report for February, the Bureau of Labor Statistics found that nonfarm payrolls rose 242,000 for the month, causing the unemployment rate to remain unchanged at 4.9%. With job losses in mining, which has a higher proportion of union membership, the total amount of workers in unions has probably fallen. This is especially likely as the sectors seeing job gains—healthcare, social assistance, retail trade, food services, and private educational services—have much lower unionization rates.

The shift of the labor force from higher paid positions (mining) to lower paid ones (social assistance, retail, food services) may also explain the fall in hourly earnings and total hours worked. Average hourly earnings fell to $25.35 from the previous month, while the average workweek fell 0.2 hours to 34.4 hours for the week.

Another cause for weakening hours worked and incomes for workers may be the lower labor participation rate. Labor force participation rose slightly in February to 62.9%, but remains lower than any point since the 1970s. According to a study by the President’s Council of Economic Advisors, about half of the decline is due to an aging population, but labor participation rates among younger people have fallen more significantly than older people, indicating that an emerging trend of stubborn and persistent youth unemployment is also hurting the American workforce.

Economists struggle to understand the trend, which is also asserting itself in Europe and parts of Asia. Younger workers are finding it harder to get, and keep, entry-level jobs, and they are being offered fewer social services and union protections that previous generations enjoyed. As a result, their desperation to keep any job, no matter the pay, may be keeping incomes, working hours, and working conditions from improving.