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4 Reasons Why New Jobs Are Paying Less

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Jobs are recovering, but unfortunately wages aren't.

As the American Enterprise Institute's James Pethokoukis summarizes:

A new study from the US Conference of Mayors and IHS Global Insight gives the discouraging news. In 2008 and 2009 the US economy lost 8.7 million jobs. By examining the sectors from which the jobs were lost, most notably manufacturing and construction, we find that the average annual wage in sectors (current wages weighted by number of jobs) where jobs were lost in the downturn was $61,637. A similar accounting of the jobs gains through 2014 q2 shows average wages of $47,171 per year. This wage gap, at 23%, is significantly larger than that of the earlier recession and recovery, and implies $93 billion in lower wage income. Extensive job losses in high-wage manufacturing ($63K) and construction ($58K) sectors were replaced by jobs in the lower wage sectors of hospitality ($21K), health care ($47K), and administrative support ($37K).

There are at least four economic trends that are keeping wages for new jobs low. I know this. I see this in my own business. I see it amongst my client base.

There remains less of a demand by employers to hire more people. And when we do hire we're not willing to pay more if we can avoid it. And we can avoid it. We can outsource. And we do. oDesk, an outsourcing marketplace (which recently merged with Elance, another outsourcing service) reported that the number of employers using outsourced contractors on their site rose by more than 900 percent between 2009 and 2013 and in that same period the number of working freelancers increased 1,000 percent per quarter. I see this all the time. Why hire someone full-time and incur all the costs of employment (taxes, healthcare, etc.) when you can hire a skilled person by the hour or per diem from any number of great sources online and around the world? And if you're independent-minded, why be saddled with a job at one company when you can outsource your services to multiple companies, at a higher rate per hour (this, by the way, is not figured into the wage calculation above) and with greater flexibility?

There is better technology to make people even more productive. Where there were once shifts every eight hours, requiring more bodies and overhead, businesses like mine now staff themselves almost round the clock with one set of employees because we can get more work done with the same group. OK, so maybe we're a few years away from the days when un-manned drones and driverless trucks will be delivering our products. But we have technology today that didn't exist a decade ago and it's reducing the amount of people we need to employ. We have online knowledge centers so customers can research, do work on their own, or submit problems. We have mobile devices that enable our people to work on the go. Manufacturers are investing in machinery that makes product with less human involvement. There are workflows to automatically send invoices or reorder products. There are collaboration systems from the likes of Microsoft, Google and others to help us do work together wherever and whenever. Even our financial systems, led by products such as Xero, Square, ZenPayroll and Expensify, allow our employees to invoice, receive cash, enter hours and track expenses on their own and without the need of additional people to do the data entry.

I see a general lack of commitment amongst my client base. The economy has been slow. The mood in Washington is not positive. There is an overall anti-business climate, justified or not, that many of my clients seem to perceive. As a result, I still see of these businesses sitting on their cash and they're in good company, with a record $1.64 trillion in cash being held by corporate America at last counting. Sure, they're investing more when a project has a high chance of a positive ROI. They're also scooping up debt at historically low rates if they can. But they are holding back on anything that is more risky. They are averse to incurring the cost and commitment of staffing-up in an environment where the uncertainties of rising healthcare, taxes and regulations outweigh the benefits of making such investments.

Finally, the industries that are growing are doing so with low wage jobs. According to a recent New York Times report a study from The National Employment Law Project "...found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries- which often pay wages at the federal minimum, accounted for about 40 percent of the increase in private sector employment over the past four years." Another report shows that 12 of 20 fastest growing businesses are in construction - an industry that was knocked on its bottom during the recession and is only now starting to claw its way back, but at a shadow of its former self. I see this everywhere. People are starting businesses like services, contracting, consulting and small shops and restaurants because there is a low capital requirement. Banks are not lending to these companies - they, too, learned their lesson from the recession. These businesses have very few people and those that they employ are of a lower-skilled need. Sure, we hear of the multi-zillion dollar venture-backed tech startups in Silicon Valley (many who outsource their higher skilled development work overseas), but other than the handful that make the news the vast majority of them struggle to get noticed, get financing and to survive.

So there are more jobs. But they're paying less. I'd frankly rather pay my existing people a little more to get things done in order to avoid hiring a new person at a higher wage. This is why new jobs added since the recession are not paying well. Clearly, I'm not alone.

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