What’s Holding Back Wages in America?

(Bloomberg Businessweek) -- America’s labor market is a jigsaw puzzle whose pieces don’t quite fit together.

Unemployment has plummeted to 3.9 percent, the lowest level since the early 2000s. Earnings calls are replete with chief executive officers bemoaning employee shortages. Small businesses are also feeling the pinch. In a July survey by the National Federation of Independent Business, 37 percent of owners reported at least one vacancy, and more than half said there were few or no qualified candidates for the job.

Despite this, wages are creeping higher rather than making the robust gains a hot labor market ought to produce. Accounting for inflation, paychecks actually shrank in July. The disconnect has surprised Wall Street economists and Federal Reserve policymakers alike.

What’s Holding Back Wages in America?

To shed some light on what may be holding down pay, Bloomberg News reporters interviewed employers in three industries in which wages remain low despite persistent reports of worker shortages—construction, long-haul trucking, and child care.

What they found is that the impediments keeping wages from taking off are diverse, and in some cases seem unlikely to change quickly. Still, there are glimmers of hope that a tight labor market might be on the cusp of pushing earnings higher.

In Tennessee, one trucking company is having success in recruiting drivers with higher pay, hinting at a turning point in an industry where wage gains have lagged. Atlanta’s construction market, on the other hand, shows that raises can’t help alleviate a shortage if there’s a dearth of qualified workers. The experience of a child-care center in Minnesota illustrates that slow wage gains in other industries can put a structural ceiling on pay in service-sector jobs.

What’s Holding Back Wages in America?

Chasing Hard Hats in Atlanta
Homebuilders in Atlanta could finish 30,000 houses in the metro area this year if they had enough hands to put them up, says Jim Brown, vice president of the Home Builders Association of Georgia. That’s 50 percent more than this year’s actual pace.

To build a pipeline of skilled laborers, the Construction Education Foundation of Georgia has been training 250 workers annually, at no charge, to fill entry-level positions. About half have felony records, says President Scott Shelar. Funding for the nonprofit comes from construction companies. Meanwhile, PeopleReady, a staffing company, has attracted workers from Alabama and Tennessee with food and hotel allowances, says Terry Daugherty, the company’s construction director. The efforts helped boost Georgia construction employment 8.8 percent in June from a year earlier, the fastest growth since 1999.

Still, employers are holding annual raises to about 3 percent, which is just tracking inflation, preparing for the moment when labor shortages will force them to pay higher salaries. Starting pay in the Atlanta area is about $15 an hour, almost double the federal minimum, and some in the industry say there’s no point in raising it too quickly. Higher wages would largely draw unskilled laborers when the main demand is for skilled positions—painters, roofers, electricians, carpenters, and bricklayers—and would elevate house prices, says Brown, whose JWB Properties in Smyrna, Ga., specializes in high-end homes. “Construction work is not easy,” he says. “Most people won’t work that hard.”

Although the companies in the Russell 3000 Homebuilding index have an average profit margin of 6.2 percent, the way the industry runs itself depresses wages. Homebuilders bid out jobs such as framing, roofing, plumbing, or bricklaying, and subcontractors win the work based partly on price. That gives companies such as Sentry Roof Services in Norcross, Ga., scant room to maneuver.

Sentry, which employs 70 people, has started a recruiting campaign on Facebook, LinkedIn, and Twitter and has focused on improving retention by ensuring that managers treat workers well. “The last thing you need is an old-school supervisor ripping people apart,” says owner William Lomel.

While Sentry wants to hire an additional 15 to 20 workers, Lomel says “you have to be competitive” on price or else lose business. He raised wages to $15 an hour a few years ago and says a big increase is likely, though he and other contractors will hold the line as long as possible: “It is something I have got to look at.”

Big companies like Miami-based Lennar Corp. primarily negotiate with contractors and use their local labor, says JMP Securities housing analyst Peter Martin. “If Bob Smith Electric charges $3 an hour for its workers, you will hire Bob Smith Electric. Lennar is going to pay what they can get away with.”

What’s Holding Back Wages in America?

More Money for Truckers
America’s long-haul trucking companies have been complaining of a driver shortage for years. Annual turnover in the industry sometimes runs higher than 100 percent, and companies deploy ranks of recruiters to keep the wheels turning. Drivers, who earn a median annual pay of about $44,000, jump from carrier to carrier—or just burn out.

But operators have an opportunity before them: Shipping rates jumped 14 percent in the 12 months through June, as economic growth outpaced the industry’s ability to move freight, sending truck use to almost 100 percent capacity, according to Freight Transportation Research Associates.

Rob Hatchett, a recruiter for Covenant Transport Services in Chattanooga, is throwing money at the problem. Covenant this year has boosted weekly pay for new drivers from $450 to $600, and it raised annual pay 10 percent on average across its fleet of more than 2,600 trucks. During the past eight weeks, the company has posted its best hiring numbers since Hatchett started in 2012. “We’ve finally raised pay enough that we are beating our competition right now, beating the economy as a whole,” he says. “I’m loving life.”

So far, however, pay increases such as Covenant’s haven’t found their way into U.S. Department of Labor statistics, which show average hourly earnings in long-distance trucking up just 0.95 percent in the year ended June 30. The consumer price index rose 2.9 percent in the same period, which means wage growth was negative in real terms. Carriers are competing for drivers not only with one another, but also with booming sectors such as construction and manufacturing, where average wages are better and employees have the luxury of sleeping in their own bed.

Frustrated with the stagnant pay, Max Akhmatjonov, a 22-year-old Brooklyn resident, recently quit the trucking company he worked for to become an owner-operator, driving his own rig on contract jobs. He’ll take home more money, though he’s also responsible for all his costs. At the Tullo Truck Stop in Kearny, N.J., where he parked after a cross-country trip, Akhmatjonov said the industry’s problem isn’t too few drivers, but low wages. “I’m always reading this kind of news, but I don’t feel this shortage,” he says. “That’s why nowadays it’s better to lease a truck and become an owner-operator.”

What’s Holding Back Wages in America?

A Looming Child-Care Crisis in Minnesota
Karen DeVos operated a child-care business out of her home in Ada, Minn., looking after 12 children with the help of one part-time aide. She dreamed of expanding, but each time she ran the numbers she ended up with the same result: Parents in this town of 1,700 couldn’t afford to pay enough to cover her costs.

Then a once-in-a-lifetime opportunity came along. When a charity gave a local senior community a grant to add an assisted living facility, it stipulated that the space must also house a childhood education center. Today, toddlers’ voices ring down the halls of the Benedictine Living Community. Seniors play games or make crafts with the children every morning. Scholarships help low-income families afford the cost of attendance, which is $145 a week for an infant. “I love catching the ‘grandparents’ watching and laughing as the kids play outside on the playground,” says DeVos, who runs the center, called Little Learners, where 52 children from age 3 months to 10 years are currently enrolled.

As the hot economy creates opportunities for stay-at-home mothers and fathers to reenter the workforce but wages fail to take off, Ada and other communities across the country are grappling with the same issue: a lack of affordable child care. In 33 states and the District of Columbia, licensed infant care costs more than tuition at a public four-year college, according to analysis by the Economic Policy Institute. In Washington, D.C., the priciest market, infant care comes in at a hefty $22,631 a year on average.

Despite those prices, child-care center owners generally don’t cash in because the work is labor-intensive. Centers must hew to a ratio of 1 worker per 3 infants to meet guidelines from the National Association for the Education of Young Children.

“By definition, high-quality child care is not efficient,” says Katie Hamm, vice president for early childhood policy at the Center for American Progress. “We haven’t seen the wage growth we need to see because it’s essentially a broken market.” Child-care and nursery workers’ hourly earnings increased 3 percent on average in June, rising more than wages overall, but not by much.

“It is very difficult to find high-quality employees in early child care,” says DeVos, who oversees a staff of nine at Little Learners. Her high school helpers earn minimum wage, while those with more experience earn from $10 to $15 an hour.

Nationwide, child-care workers earn only $11.42 an hour on average, or $23,760 per year, so the temptation to shift into better-paying work is strong. In fact, the number of people employed in the industry has declined in recent months.

“Nobody wins in this situation,” says Jacqueline Sullivan at the Institute for Research on Labor and Employment at the University of California at Berkeley. “You have parents making really difficult choices, you have early educators who are also making difficult decisions because of their low wages.”

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net, Cristina Lindblad

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