NCPA - National Center for Policy Analysis

What's Behind Wage Restraint?

May 27, 1999

Given today's tight labor market, economists would expect to see wages and salaries climbing sharply. But that's not happening. The Bureau of Labor Statistics' employment cost index rose just 2.2 percent year-over-year in the first quarter of 1999.

Here are some of the theories as to why wages are more or less steady:

  • In their race to bring their computer systems into Y2K compliance, many employers have discovered how investment in technology can increase productivity without the need to hire expensive new people.
  • Well aware of the shortage of qualified workers, many companies are delaying expansion plans and not hiring.
  • Utilizing labor in foreign countries to produce parts, U.S. employers are contributing to reduced pressure on U.S. wages.
  • The Federal Reserve and its chairman, Alan Greenspan, have successfully contained expectations of inflation, thereby preempting upward pressure on wages.

There are other factors as well:

  • With inflation in check, workers regard their paychecks as sound money and are not clamoring for raises just to stay ahead of the game -- as they did in the 1970s and early 1980s.
  • Global competition and falling-to-steady commodity prices have put a lid on price hikes.
  • Generous employee benefits are diffusing demands for pay increases.

Source: John S. DeMott, "Why Are Wage Gains Still Tepid?" Investor's Business Daily, May 27, 1999.


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