January 9, 2019 • Van Williams

Why Employment Rates and Wage Growth Aren’t Adding Up

The national unemployment rate has fallen steadily for years, now at an unprecedented low of 3.7% nationally and just 1.6% in the technology sector. Surprisingly though, wage growth has remained virtually stagnant. In 2019, average salary increases aren’t expected to reach beyond 2.9%, only a slight .01% uptick from 2.8% in 2018. Though the economy is booming, employees’ salaries aren’t seeing the benefits. What gives? We’ve developed a few potential explanations for why employment rates and wage growth aren’t adding up.

Demographic Changes

One reason why wages aren’t skyrocketing in this employee-centric market is due to dramatic demographic changes currently taking place in the workforce. As baby boomers retire en masse, their younger, less-experienced counterparts are earning significantly less, skewing average pay numbers. Additionally, with an abundance of entry-level job opportunities on the market, new entrants to full-time work, whether for the first time or returning from a leave of absence, are more likely to make lower wages. While there is obvious job growth, a rise in entry-level positions can slow the pace of wage growth by pulling the average numbers down. That said, the composition of the workforce is constantly evolving, so it’s likely that there are more factors affecting the market than just employee demographics.

Alternative Compensation

Today, more and more employers are focusing on providing alternative compensation to their workers. This is due in part to the pressure that they face to think outside of the box when attracting talent in a competitive landscape. Bonuses, enhanced benefits, and extra time off are critical additions to compensation packages and can be a deciding factor for employees with multiple offers. That being said – the funds have to come from somewhere. While employees are still being fairly compensated, these benefits drive down wages across the board. Programs that require additional HR personnel or increased funds can directly affect employee salaries at every level, and the economy as a whole is seeing the effects.

Workforce Trends

There are multiple major workforce trends that could also be playing a part in the stubborn lack of wage growth. Increased restraints on competition, such as noncompete clauses, prevent workers from negotiating their compensation, as many get their highest raises when they leave their current company or threaten to. Also, these contracts slow down the hiring process and prevent business growth, driving away talent from companies that necessitate their skills.

Outsourcing is another trend that effects wage growth. Where companies used to hire full-time employees for certain work, now they have the option of instead utilizing a temporary contractor. Often, contractor’s wages tend to differ because they aren’t compensated based of off existing internal pay scales and norms. And, since the work is for a limited period of time, companies aren’t paying entire yearly salaries, instead just stipends of what they once spent. Today, there are 15.5 million U.S. workers in alternative arrangements, such as contractors.

Predicting the Future of Wage Growth

The bottom line is, there isn’t one definitive culprit for this phenomenon and it doesn’t seem to be changing in the near future. It’s virtually impossible to guarantee when wages will begin to grow and by how much. What we do know, is that the Smart Resources team has insight to help you navigate the current market. Whether you’re seeking assistance accurately determining the right compensation for your employees or you require a hand with tough to fill roles, we’ve got the expertise that you need.