2016: The Year of the Raise
In the years since the Great Recession, America has seen numerous financial benchmarks return to positive levels: housing prices have largely recovered, unemployment has dropped to half its peak, new automobile sales have been pushed to record highs and most of world stock markets have significantly surpassed their pre-crisis values.
But despite all the major improvements, the recovery has been largely absent from wage growth. According to the Economic Policy Institute, U.S. workers have averaged annual wage increases of about 2.0 percent since the recovery started in 2010. That growth is around half the
3.5–4.0 percent seen in a healthy U.S. economy.
Why Have Wages Stayed So Low?
High unemployment has been the main reason for the low wage growth, but the sluggish consumer spending, low inflation and even corporate expansion strategies are also to blame. The recession slammed the economy, putting many companies out of business and taking huge tolls on the revenue of almost everyone else. Low on earnings, many companies cut or froze salaries during the decline and have only felt comfortable with smaller raises
ever since.
Under normal economic conditions, absent or slow wage growth would quickly cost a company many of its employees; however, persistently high unemployment and a poor job market have kept workers from quitting and robbed them of power when negotiating salaries. Additionally, low inflation has hurt the argument for higher wages. The recovery’s 2.0 percent wage growth is historically low, but it has outpaced its 1.4 percent average inflation rate. Wages are growing slowly, but employers can argue they still are growing in real value.
Why Many Think 2016 Will Be Different:
There are several reasons to think that 2016 will be the year wage growth gains traction. In the last months of 2015, the unemployment rate dropped to 5 percent, a level the government associates with “full employment.” There were also over 5 million job openings at year’s end, with many employers complaining they couldn’t find enough skilled workers to fill critical positions. This tightening labor pool suggests that employers will need to fight to keep employees in the coming years—and one of the best ways to do that is raising their wages.
This isn’t necessarily bad news for businesses. The economy has been steadily improving and consumer spending has been climbing. Many businesses have also consolidated in the past year, improving their efficiency. While companies may need to pay employees more, most should be making more money and many will be paying fewer employees for the total amount of work being done.
Some of the compensation increases have already started happening, though not in the traditional form of pay raises. Data from the Bureau of Labor Statistics shows that companies have recently increased spending on benefits and bonuses in an effort to improve employee satisfaction, motivation and work-life balance.
Why 2016 Might Be the Same:
There is no guarantee that 2016 will be year that wages move back to their pre-recession growth rates. The economy still faces many uncertainties. While the current unemployment rate reflects “full employment,” the number of discouraged and underemployed workers is still abnormally high. Some economists believe that these potential employees may keep wages depressed until they find good jobs. Business mergers, while good for company efficiency, could actually contribute to this problem. Large mergers can lead to major layoffs, increasing the number of people looking for work.
In the end, the ability to get a raise always comes down to the value employees provide to a company. If their skills are valuable and unique, their employer will happily pay more to keep their talents. A smart business cannot ignore the workers that make it successful.
This article was written by Advicent Solutions, an entity unrelated to Fingerlakes Wealth Management. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Fingerlakes Wealth Management does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2016 Advicent Solutions. All rights reserved.
