Why wages aren't rising

jobs wages punch clock
The economy has been adding jobs, but high unemployment is keeping wages low.

When the government report on job creation came out last week, economists were quick to note a worrying point: average hourly wages in August dropped by a penny.

Though one cent may not sound like much, the drop underscores a broader trend: Amid sluggish growth and stubbornly high unemployment, wages just aren't rising very quickly.

One reason is that persistent unemployment is keeping workers from getting salary increases.

"If your employer knows you don't have a lot of options, there's no incentive to give you a raise," said Heidi Shierholz, an economist at the left-leaning Economic Policy Institute. "It shifts bargaining power away from workers and toward employers."

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Over the last year the average hourly wage for jobs in the private sector has gone from $23.12 an hour to $23.52 an hour, according to the Bureau of Labor Statistics. That represents a gain of 1.7%, slightly higher than inflation over roughly the same time period.

But stripping out managerial and professional jobs, wages rose just 1.2% -- below the rate of inflation. According to Shierholz, 82% of the private work force is in non-managerial jobs.

"People think high unemployment only affects people without jobs," said Shierholz. "But it also prevents people from getting raises."

Related: Check the unemployment rate in your state

Another reason for sluggish wage growth is that much of the recent job growth has been in low wage industries.

High unemployment also pushes people to take jobs they otherwise wouldn't. This is especially true as economic growth remains weak and unemployment benefits run out.

Many of the jobs created since the recession officially ended in 2009 have been in lower wage industries like retail or food service work.

Nearly 40% of the private sector jobs added since early 2010 have been in retail, leisure and hospitality, temporary staffing and home health care, according to a recent report from Wells Fargo, even though these industries account for only 29% of all jobs.

The average hourly wage in those four industries is just $15 an hour, the bank said.

In August, 28,000 new jobs were added in food services and drinking places. And those industries have grown by 298,000 jobs over the past 12 months.

Who killed the recovery?
Who killed the recovery?

Without wage growth, consumers are loath to spend more, and the economy is unlikely to find its footing any time soon.

"The lack of real income growth is a major factor in preventing the economy from achieving the escape velocity needed to break free form the 2% trajectory maintained over the last couple of years," Wells Fargo Senior Economist Mark Vitner wrote in the report.

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