Workers find themselves caught in a bind as cost of health insurance rises.
April 17, 2005
For the first time in 14 years, the American work force has in effect gotten an across-the-board pay cut.
The growth in wages in 2004 and the first two months of this year trailed the growth in prices, compounding the squeeze from higher housing, energy and other costs.
The result is that people such as Victor Romero are finding themselves falling behind.
The 49-year-old film-set laborer had to ditch his $1,100-a-month Los Angeles apartment because his rent kept rising while his pay of $24.50 an hour stayed flat.
''There's no such thing as raises anymore,'' Romero said.
This is the first time that salaries have increased more slowly than inflation since the 1990-91 recession. While salary growth has been relatively sluggish since the 2001 downturn, inflation had stayed relatively subdued until last year, when the consumer price index rose 2.7 percent. But average hourly wages rose only 2.5 percent.
The effective 0.2-percentage-point erosion in workers' living standards occurred while the economy expanded at a healthy 4 percent, better than the 3 percent historical average.
At the same time, corporate profits hit record highs as companies got more productivity out of workers while keeping pay raises down.
Some see climbing profits and stagnant wages as not only unfair but ultimately unsustainable. ''Those that are baking the larger pie ought to see their slices expanding,'' said Jared Bernstein, an economist with the liberal Economic Policy Institute in Washington.
On the other hand, higher wages could hurt the economy by stoking inflation. Employers might pass the costs on to consumers in higher prices, and that in turn might prompt the Federal Reserve to raise interest rates even more aggressively, possibly slowing the recovery or even triggering a recession.
For now, workers' wallets are being pummeled by something of a perfect storm of economic forces: a weak job market, rising health insurance premiums and inflationary pressures.
The jobless factor
The biggest factor is the slack employment market, which means there is little pressure on businesses to boost pay. ''They take advantage of you because there's no work and anyone will work for anything,'' Romero said.
Although the unemployment rate has dropped to a relatively low 5.2 percent, that figure doesn't count the hundreds of thousands of jobless people who've given up their searches and dropped out of the labor market at a greater rate than any time since 1988.
At the same time, the cost of health premiums has skyrocketed, eating into the pool of corporate cash set aside for raises. While pay increased only about 2.4 percent last year, benefit costs jumped almost 7 percent.
Health care's bite
With benefits factored in, workers' total compensation did outpace inflation in 2004, even if they didn't see it in their paychecks.
But employers also are requiring workers to pay a greater share of their premiums.
''Health care has eroded the wage base,'' said Janemarie Mulvey, chief economist with the Employment Policy Foundation, a business-funded think tank in Washington. ''In the long run, we can't continue like this. If health care keeps crowding out wages forever, something's got to give.''
The squeeze is especially intense on the 47 percent of the work force whose employers don't directly provide their health insurance. For lower-income workers, who are more likely to be uninsured, the falling value of their wages is even more serious, because they're more likely to live paycheck to paycheck. And rising food and energy prices take a higher toll on the poor than on the rich.
Historically, periods when wage growth is outpaced by inflation rarely last more than 18 months.
That's partly because businesses don't want their employees' living standards to fall, because that injures morale, said Trewman Bewley, a Yale University economist who has studied wage activity during economic downturns.
Many economists figure it's only a matter of time until workers can pry more money out of their employers to catch up to inflation again. If economic growth remains robust, as many forecasters predict, workers may gain greater leverage to negotiate wage hikes.
''Chances are that those workers that have problems getting by because of higher fuel prices will probably tell their employers, 'I can't make it,''' said John Lonski, chief economist at Moody's Investors Service.
So far that hasn't worked for Brian Chartier. The 29-year-old Glendale, Calif., resident handles inventory for a Los Angeles manufacturing company. No one there, he said, has gotten a raise in two years.
'There are no jobs'
''They're able to do this and I haven't quit, because where am I going to go?'' he said. ''There are no jobs.''
While his salary remained flat, rising health-care premiums kept eating up more and more of his take-home pay, so he dropped out of his employer's insurance program. His rent also is climbing.
As Chartier loaded bags of groceries into his Honda Civic last week, he boasted that they were full of bargains.
''I don't get a single thing that's not on sale,'' Chartier said. ''I can't afford to anymore.''
Despite their wages failing to keep pace with inflation, American consumers have kept shopping. Consumer spending has continued to rise. Analysts say that's partly because some shoppers are thinking less about their paychecks and more about their biggest asset: their homes.
Taking shelter
Home prices have risen 9 percent nationwide since last February, sheltering consumers, and the economy, from much of the pinch of higher prices.
''There's been a wealth effect afoot throughout much of the recession and the recovery,'' said Bernstein of the Economic Policy Institute, ''because no matter what people's incomes were doing, their wealth was improving — their biggest assets, their homes, were accruing.''
As inflation sparks higher interest rates, most economists expect the housing market to cool, making shoppers more dependent on their paychecks. And even those who have seen their paper wealth rise phenomenally aren't happy about rising costs and stagnant pay.
Corina Swatz has seen the value of her Los Angeles home triple during the 10 years she's owned it. But neither she nor her husband has gotten a raise in more than a year. At the same time, gas prices have forced them to shell out $55 to fill the tank of their Chevy Tahoe.
''I used to spend $600 a month [on groceries]. Now I spend $800,'' Swatz, a mother of two, said as she made her weekly Costco run last week. The increased value of her home gives her only so much solace. ''We're hanging in there.''
Economy needs spending
The danger is that people such as Swatz, despite their home-equity cushion, may rein in their spending and pull the rug out from under the economic expansion.
That's what Gabriel Torres has done. The 56-year-old cook hasn't gotten a raise in years but pays ever higher prices to fill his Nissan X-terra. He and his wife have come up with a solution: cut down on driving.
''We don't go out much,'' Torres said.
''We used to. But now we only drive when we really have to.''
Nicholas Riccardi is a reporter for the Los Angeles Times, a Tribune Publishing newspaper.
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