19 Nov. 2019 | Comments (1)
Wage growth in the US has been accelerating in recent years but remain below pre-recession rate (Chart 1). In an era of historically tight labor markets that includes intensifying competition for talent and historically long times to fill vacant positions, why have wages risen more modestly than analysts expected? The Conference Board Salary Increase Budget Survey, which was just released this week, provides a unique explanation for why wages have been accelerating more modestly than many analysts have expected in recent years: Employers have been slow to raise salary structures in their companies. So, while wages for new hires have been accelerating since 2011, salary increase budgets are holding back overall wage growth.
Chart 1: Average hourly earnings and the Employment Costs Index (wages and salaries) for private industry workers, three-month moving and quarterly averages, year-over-year percentage change, 1987 to October 2019
Source: US Bureau of Labor Statistics
About The Conference Board Salary Increase Budget Survey
This year, 229 organizations completed the survey, which was fielded between April 16 and June 21. We requested data for four employment categories: nonexempt hourly (nonunion), nonexempt salaried, exempt, and executive.
Salary increase budget refers to the pool of money an organization dedicates to salary increases for the coming year. It is represented as a percentage of current payroll generally; the salary increase budget is calculated using a predetermined total percentage of base pay (excluding overtime, bonuses, etc.). The budget is used for awarding merit or performance increases to individual employees. It may also be used for pay adjustments, such as promotional increases.
Salary structure movement or adjustment refers to the changes (usually annual) to the salary structure of a compensation program. Organizations make these adjustments to the minimums, midpoints, and maximums of their pay ranges to account for changes in the cost of living and salary markets within the industry.
Salary Structure Movement and Salary Increase Budgets
Chart 2 shows the salary structure movement for several groups of workers. During the Great Recession, salary structure movement collapsed to its lowest rate ever; it recovered to almost 2 percent in 2011, but since then has shown almost no acceleration and has remained well below prerecession rates. The chart suggests that employers are raising salary structures much more slowly than they did before the Great Recession. Chart 3 shows that salary increase budgets have behaved in the same way.
Chart 2: Average actual salary structure movements, percent change from previous year, by category, 1998 to 2019
Source: The Conference Board
Chart 3: Average actual salary increase budget, percent change from previous year, by category, 1998 to 2019
Source: The Conference Board
Why is overall wage growth still below prerecession rates and how is this related to salary budgets and structures?
The expansion of the past decade is characterized by a tightening labor market but relatively slow economic growth and weak price inflation. The tightening labor market has a strong impact on the wages of new hires, which have been accelerating rapidly in recent years.
However, wage increases for new hires are not typically included in salary increase budgets. This means that with almost no acceleration in salary budgets and structures, wage growth for existing workers has remained modest, reducing overall wage growth.
In addition, in some companies, salary increase budgets generally do not include promotional increases or market adjustments, including large adjustments to comply with rapidly rising minimum wage laws in recent years.
Salary structure movements and salary increase budgets may be more affected by cost of living adjustments than by labor market conditions, and, in the past decade, inflation has remained more muted than at any time since the 1960s. It has been documented that when inflation declines, a smaller share of workers receive cost of living adjustments. This may also explain why the share of job stayers (workers who stayed in their jobs over the past 12 months) with no change in wages over the past 12 months, has been well above historical rates over the past decade (Chart 4).
Chart 4: Overall inflation and the share of job-stayers with no change in wages in the past 12 months
Sources: BLS, FRBSF
In recent years, the faster wage growth of new hires versus the stagnation of salary increase budgets is leading to historic levels of pay compression—when the wage premium for experience shrinks—so that more experienced workers feel that their pay advantage is no longer significant. Such pay compression is leading to higher labor turnover of more experienced workers who can easily find new jobs in this tight labor market.
More about pay compression in our next blog.
Or, watch this webcast to learn more about the impact of today's tight labor market on wages.
“In 1976, 61% of union workers covered by major collective bargaining contracts had COLA provisions, but by the end of 1995, when the U.S. Bureau of Labor Statistics stopped collecting data on collective bar-gaining settlements, COLA coverage had fallen to 22%.”