Dec 01, 2015

The Widening Wage Gap

Most major statistics show that income inequality, or the gap between the rich and poor in the United States has been growing over the past 30 years.

Gains By Income Group

Gains By Income Group

Source: Congressional Budget Office

In this article, we examine some of these wage disparities, and also look at the potential reasons behind them. 

Wage Gap Between High-Level and Low-Level Workers

Recently, analysts have started to notice a new pattern in employee compensation at corporate offices, law and accounting firms, and other white-collar employment locations across the United States. For the first time since the economic recovery began six years ago, white-collar professionals with specialized skills in fields such as technology, finance, engineering, and software have an upper hand in wage negotiations.

Despite the steady addition of more than 200,000 jobs per month and a decline in the official unemployment rate, most workers are facing lukewarm wage growth. Since the beginning of 2014, median wages for all those holding a bachelor’s degree or more have risen 2.7 percent, compared with about 2 percent for all workers. However, among the top 10 percent of earners holding college degrees, wages are higher by more than 6 percent.

“If you want wage growth, you’re going to need a specific set of skills. The B.A. gets you in the door – there’s not much unemployment for people with a college degree – but it doesn’t allow you the wage growth you’d expect.” ~Matt Ferguson, CEO of CareerBuilder

Growing Disparity Between the Highest and Lowest-Paid Positions

Growing Disparity Between the Highest and Lowest-Paid Positions

Source: BLS & The New York Times

A study by the Bureau of Labor Statistics (BLS) found that in fields such as art, entertainment and media, compensation near the top of the scale was six times what it was near the bottom in 2014. The best-paid healthcare professionals earn four times what workers in the lower tier make. According to ADP, for workers earning less than $50,000 in fields such as art, entertainment and media, healthcare, finance, and real estate, wages fell in the third quarter of 2015, while their colleagues in the $75,000 and above category had a 3.4 percent increase in wages. 

Recent Graduates

A December 2014 survey by CareerBuilder revealed that 37 percent of employers are hiring college graduates for jobs that previously required only a high school degree. Graduates, even those in the highly sought after STEM (science, technology, engineering, and mathematics) fields are finding that the skills that they learned while in school are becoming obsolete in rapidly evolving specialties such as social media.

While the war for top talent among companies such as Facebook, Amazon, and Google or among Big Pharma companies and biotech start-ups is causing salaries in the best-paid jobs to grow, lower-tier workers in these fields are only seeing modest gains.

For example, according to the National Association of Colleges and Employers (NACE), newly graduated engineers have historically earned more than humanities majors. But that gap is becoming even more wide, with engineers from the class of 2014 finding jobs with starting salaries of $65,000 per year compared to just under $42,000 per year for liberal arts graduates.

And yet, experts warn that simply studying something “practical” is not a guarantee of increasing wages in today’s economy. According to NACE data, salaries for hospitality majors have dropped by 10.6 percent over the past seven years though the industry has added nearly two million jobs since 2008. Education and human resources graduates are also experiencing sharp wage declines.

Starting Salaries, 2007 vs. 2014

Starting Salaries, 2007 vs. 2014

Source: NACE & The New York Times

CEO vs. Average Workers

The average U.S. worker has experienced wages that have climbed slowly over the past year, while the average large-company CEO has seen compensation jump substantially. According to a new report by the AFL-CIO, CEOs at the country’s largest publicly traded companies received 373 times the compensation of the average production and non-supervisory worker in 2014. Figures from the report show that the gap widened from a 331-to-1 ratio in 2013 as overall CEO compensation rose nearly 16 percent year-over-year. Meanwhile, the average worker’s wages rose just 2.4 percent.

According to AFL-CIO calculations, the average worker earned $36,134 in 2014, while the compensation for CEOs at S&P 500 companies averaged about $13.5 million.

Ratio of Average Top-CEO Pay to Average Worker Pay

Ratio of Average Top-CEO Pay to Average Worker Pay

Source: AFL-CIO & The Wall Street Journal

Gender Pay Gap

While various parties have frequently discussed the topic of a gender pay gap in the United State over the years, it has recently gathered attention again especially pertaining to companies in the technology sector as well as with  actors and actresses in Hollywood. A recent study by PayScale that looked at data from over a million people found that overall, American women earn just 74 cents for every $1 a man earns. Furthermore, the report found that there is no industry where women earn the same or more than men and there is no state where women earn more than men. This gap widens even further as one progresses up the job ladder. The study found that even if everything – job title, industry, experience, location, and whether they have kids – is equal, American women earn 97 cents to the $1 men earn.

A CNNMoney analysis found that only 5 percent of CEOs in the S&P 500 are women, and that when looking across the “C-suite”, only 16.5 percent of those leadership roles are held by women.

The gender gap becomes even broader for minorities. According to the Payscale study, African-American women only make about 64 cents for every dollar a white man earns, and Hispanic women earn about 54 cents for every dollar a white male earns.

Federal vs. Private Sector Workers

According to a review by the Federal Salary Council, federal employees are significantly underpaid compared to their private sector counterparts. The Federal Salary Council, a group that advises the President on federal wages, found that there is a pay gap of 34.92 percent. This finding marked the third consecutive year where the disparity is approximately 35 percent, with the council reporting a 35.2 percent gap in 2014 and a 35.4 percent gap in 2013.

However, a separate report by the Cato Institute found that federal employees on average earned 78 percent more in total compensation than private sector workers in 2014. A key point that might explain the variance in the reports is that the Federal Salary Council considers only wages in their calculations, while the Cato Institute report takes into account all the other benefits that federal employees receive.

“This little stalemate over whether federal employees are overpaid or underpaid will continue because it serves a lot of people’s political needs.” ~Jeffrey Neal, Senior Vice President at ICF International

Federal Pay Gap Studies and the Variances Found

Federal Pay Gap Studies and the Variances Found

Source: GovExec

“Overall employment growth is everywhere, but in terms of wage growth, it’s people making more than $75,000.” ~Ahu Yildirmaz, Head of ADP Research Institute