When the mainstream media grabs a certain negative theme, it?s usually more noteworthy than most of us think. One of the apparent contradictions in the current economic expansion has been the notable absence of increasing incomes. Different theories abound. But I’ve come up with a list of 11 reasons why you?re not making more money than you should. After all, with an official unemployment rate trending consistently below 4%, salaries should be rising all over.
That?s not what?s happening, so let?s attempt to dig down into why it isn?t.
1. ?Monopsony? (It?s a Real Word and it Really is a Thing)
I?ve heard this term maybe twice in my life. Last week it was mentioned in an article on Business Insider, Here?s why wages in America have been going nowhere.
Basically, monopsony happens in wages when a relatively small number of employers collude to suppress payrolls. Investopedia gives an example of how this this may be playing out in the tech industry:
?The technology industry is an example of this type of monopsony. With only a few large tech companies in the market requiring engineers, major players such as Cisco and Oracle have been accused of collusion and choosing not to compete with each other in terms of the wages they offer for technical positions. This suppresses wages so that the major tech companies realize lower operating costs and higher profits. This example illustrates how a group of companies can act as a monopsony.?
I think it?s safe to say this is happening in other industries as well, but they?re are bigger picture reasons why.
2. The Number of Employers is Shrinking
We?ve probably all heard the term ?mergers and acquisitions?, but associated it mostly with Wall Street. But it?s a real situation, and it affects Main Street at least as much.
Because of mergers and acquisitions, and other factors, the number of potential employers in America has been shrinking steadily for decades. Fewer employers means less competition for workers, and fewer job opportunities.
Here are some examples of how that?s playing out:
The decline in the number of publicly traded companies. Between 1998 and 2016 the number of publicly traded companies in the US fell by half. 20 years ago there were more than 7,500 publicly traded companies, and now they?re just over 3,600. That?s a massive drop in the number of potential employers, especially since they represent some of the highest paying companies. Nearly every merger or acquisition ultimately results in a reduction in the number of jobs.
Hospital closures. Hospitals are a major source of employment and not just for doctors and nurses. Yet despite a dramatic increase in both the population and healthcare spending the number of hospitals has declined from nearly 7,000 in 1981 to about 5,500 today.
The shrinking banking industry. Between 1987 and 2017 the number of banks in the United States declined from 18,000 to 5,800. That?s a decline of nearly 70% in 30 years.
Consolidation is the order of the day in industries across the economy. Fewer competitors in any given industry means fewer jobs, and more downward pressure on wages.
3. New Business Formations Have Declined Dramatically
Historically, the formation of new small businesses has been a major force for job creation. But in recent decades, new business formations have been in a steady and dramatic decline. The number of new business formations declined from more than 550,000 in 1978, to fewer than 150,000 by 2012.
Entrepreneurialism was once the economic backbone of America ? the small shopkeeper, the farmer, and the tradesmen. But today it seems like an historic novelty, as more people pursue jobs in government and corporate America.
The decline in entrepreneurship hurts the job market and wages in two ways:
- Fewer small businesses means more potential entrepreneurs competing for jobs instead of starting businesses.
- Fewer small businesses means fewer potential employers and the jobs they create.
4. The Rise of the Solopreneur
The combination of the Internet and the high cost of doing business is producing a higher number of solo entrepreneurs, or solopreneurs. Instead of operating a business and hiring employees, the entrepreneur instead works alone. Any additional services needed are subbed out to contractors and other solopreneurs, rather than hiring employees.
I?m an example of a solopreneur as a blogger and freelance blog writer, and I know many other people who are solopreneurs as well. I work from home, online, and have no employees. It?s a growing phenomenon among the self-employed, but further constricts the number of potential jobs.
Employees not only represent payroll expense, but also potential legal liability. Many entrepreneurs today, well aware of the legal environment we live in, would prefer not to have employees. It greatly lowers the potential of facing a lawsuit.
5. It?s Not a Clich? ? Machines are Replacing People
When we hear the term ?robots? it conjures up visions of some type of robotic humanoid ? like Rosie the Robot on the Jetsons ? that will eventually replace everyone?s job. But it?s far more stealthly than that. It?s being done by machines that look nothing like robots. It?s been going on for years, and it?s much more common than most of us think.
Here are some ordinary examples:
ATM machines. These not only reduce the number of tellers needed to the man banks, but also reduces the number of physical bank branches needed. ATMs are frequently available in non-bank locations.
Online banking. If I can do my banking online ? and I do ? I have less need for a bank branch. That further reduces the number of bank employees needed.
Self-serve soda fountains. Have you noticed the number of restaurants installing these devices? They?re not to make our lives easier ? they?re to enable restaurants to operate with fewer employees.
Self-serve gas stations. Since employees are no longer needed to pump gas, a station that was once manned by six people can now be easily covered with just two.
More of this is coming. McDonalds has self-serve kiosks in 3,500 restaurants, and plans to have them installed in all 14,000 US-based stores by 2020.
When the machines come in, jobs disappear.
6. Contract Arrangements are Common
Today, 20% of the US workforce is contract. The numbers are higher in some industries than others, but the trend is expected to continue growing indefinitely.
Contract arrangements are simply easier for employers. They can hire skilled workers with no implication of permanent employment. Nor do they have to pay benefits. Best of all, contract workers can fit neatly within the just-in-time strategy most businesses use today. A contract worker will be on a job only as long as the job is necessary. When it isn?t, the contract worker will be gone.
Contract work may be getting more popular, but it transfers all the power squarely to the employer. It also puts greater pressure on permanent workers, since they can easily be replaced by contractors. And I?m going to take it a step farther, and suggest the temporary nature of contract workers is spilling over to the permanent staff.
In today?s job market most jobs are temporary. Even the ones nominally considered permanent.
7. Importing of Workers
In certain industries, particularly IT, it?s become common for employers to bring workers in from other countries. A friend of mine, who runs an IT placement firm, told me that employers would prefer experienced but non-degreed tech workers from India over degreed but less experienced American tech workers. Foreign workers will work for less money, they don?t demand benefits and better working conditions, and they?ll put in more hours.
This is a situation that?s unlikely to change, and it?s putting greater wage pressure even on the most skilled workers in the economy.
8. Serial Economic Crises and the ?Happy to Have a Job? Syndrome
We have recessions every few years. But what?s making that situation more pronounced is that each recession seems to be more severe than the one before it. The Dot-com bust was being labeled ?the worst economic crisis since the Great Depression?. That was only until the Financial Meltdown hit, and took the title.
Two serious recessions ? which might?ve been called depressions in more honest eras ? have left worker shell-shocked. Workers are afraid to lose their jobs, out of fear of prolonged unemployment.
But it?s also a double-edged sword. Employers are only too well aware of that fear, and use it to subtly put the squeeze on any employee who asks for a substantial raise.
It?s produced a happy to have a job syndrome. As in an employee thinking I?m happy to have a job, or an employer saying or implying you should be happy you have a job.
The unspoken threat is you could just as easily be jobless. And it keeps salary expectations to a minimum.
9. The Online Job Boards
We might think this is a major advantage in an economy with a very low unemployment rate. But it?s likely that?s been offset by the automation of the job hunting process. Since one individual can apply for dozens of jobs in a single day with the push of a few buttons on the web, competition for jobs is severe.
300 people may apply for a single posted job. Even though only a small sliver of the 300 are actually available to take the job should it be offered, the heavy application responses cause the employer to believe it has more choice than it really does.
It?s convenient for job hunters to apply for jobs online. But the financial benefit seems to be going entirely to employers.
10. The Bogus Inflation Statistics
This is a theme I?ve touched on before (Am I the Only One Who Thinks the Published Inflation Rate is Bogus?) but it?s a major factor with income suppression.
If the Bureau of Labor Statistics reports that the rate of inflation is 2%, raises in tens of millions of jobs will be based on that number. In today?s job market, a pay increase of 3% or 4% is considered a big win. But 2% is much more common. Employers cite the official inflation statistics as the basis of their raises.
But if the real rate of inflation is 4%, and you only get a raise of 2%, your pay has actually declined by 2% in real terms. Over 10 years, your real income will have declined by more than 20%.
This is why so many people feel as if they?re falling behind, despite making more money. They’re making more money based on dollars received. But those dollars buy incrementally less each year. The net result is feeling poorer on a bigger paycheck.
John Williams of Shadow Government Statistics has been tracking inflation based on the way it was calculated in the early 1980s. That was when the government began employing various techniques to minimize the number. His tracking, which I believe to be fairly accurate, shows the real rate of inflation has been running 2% to 4% above the official rate for the past 15 years or more.
This sounds like the stuff of conspiracy theories, but it perfectly explains why so many households feel so financially squeezed. Their raises are based on the official under-reported inflation rate, while their actual cost of living is based on real-world inflation ? which never gets reported.
Once again, it?s a win for employers.
11. There?s No Shortage of College Educated Workers
In 1970 1 in 7 US adults held college degrees. Today it?s one in three. That means the percentage of Americans with college degrees has more than doubled in less than 50 years.
As much as we?re being fed the narrative that we need more education to compete, the reality is that there?s no shortage of college educated workers. This helps to explain why an unusual number of college grads are working at Starbucks or driving for Uber.
By at least one estimate, 34% of college educated workers are under-employed, working in jobs that don?t require college degrees.
Mike Shedlock, former worker in the much heralded STEM fields (Science, Technology, Engineering, and Mathematics) chronicled his transition from STEM worker to blogger back in 2014. A brilliant writer and analyst, I count him as an authority on this topic, and well worth reading.
The end result is an oversupply of college graduates. But this extends to the general workforce. Many fields today are in oversupply, which has a depressing effect on wages.
11 Reasons Why You?re Not Making More Money ? Where Do We Go From Here?
I just provided an exhaustive list of the reasons why you?re not making more money. But the real issue is where do we go with this?
I have some thoughts:
- Don?t assume any of this is temporary. We?re dealing with multiple causes, that make the direction clear. Future plans should be based on a continuation of the current trend. If we?re lucky, it won?t get much worse.
- Spending plans should be based on the most conservative income numbers. In particular, you should have a backup plan in case you lose your job and have to take one that pays even less.
- Minimize expenses on an ongoing basis. That should be especially true for major living expenses, like housing and autos. Basic living expenses should be minimized, to create greater flexibility at the margins.
- Work to be the best you can be at whatever job you have. That means taking on greater responsibility, and adding new skills. It doesn?t guarantee a higher income, but it does increase the chances.
- Look to broaden your income base. Most jobs today only pay so much. Your ability to increase your income may come from outside your job. Inventory your skills, abilities, and desires, and see what you come up with.
- Starting some sort of side business should be a consideration. Avoid generalizations like ?I?m not cut out to be self-employed?, or ?I?ve never done that before?. Anyone can become self-employed. It?s just a matter of finding what it is you like to do ? or do best ? and monetizing it. You don?t have to quit your job, a side business will work just fine.
Have you been stuck in a limited pay level? What are you doing to deal with it?