by Brian T. Lynch, MSW
The growing gap between the economy on Main Street and Wall Street, a declining standard of living, the shrinking middle class, the rise in the need for government subsidized supplemental income and social services for so many, the sense that our children won’t be better off than we are today, all of this has a common origin. They are all connected! They are all the result of wage stagnation (or suppression as I see it.)
In the period of just a few short years, beginning in 1973, employers stopped giving workers productivity raises. Since then, almost all the raises workers have received were merely inflation adjustments, not rewards for their growing productivity. All those rewards suddenly went to those at the top. The effects of this on the economy are compounded over time. Forty years of this nonsense has brought us most of the economic ills we experience today.
The fact that “growing the economy” no longer results in rising worker compensation has been lost on politicians in both political parties. In fact, almost every policy initiative to “grow the economy” has made matters worse. It has often meant slashing taxes for the wealthy (trickle down theory), granting tax breaks for big businesses, and creating tax loopholes for the “job creators” so they can do their thing. Well, their thing is to get substantially wealthier. Almost all new wealth has gone to the top while the wealthy hide more and more of their assets in tax havens. State and local governments can hardly manage to patch up the potholes on our streets because of the combination of tax breaks for businesses and subsidies for the expanding numbers of working poor families.
The Economic Policy Institute has released yet another report on why most of us are not feeling the love from the Wall Street economy. I have take liberties with their findings to condense them a bit so their impact is clearer.
The Economic Policy Institute has released yet another report on why most of us are not feeling the love from the Wall Street economy. I have take liberties with their findings to condense them a bit so their impact is clearer. For the full report, go to:
Understanding the Historic Divergence Between Productivity and a Typical Worker’s PayWhy It Matters and Why It’s Real
By Josh Bivens and Lawrence Mishel | September 2, 2015
Here is my summary of their summary of findings:
- From the end of World War II until the mid-70’s, inflation-adjusted hourly wages and benefits rose in step with increases in our growing hourly GDP, which measures our economy-wide productivity. This parity between wages and productivity created the middle class.
- Since around 1973, hourly compensation has not risen with productivity grown. In fact it almost stopped very abruptly. Net productivity grew 72% between 1973 and 2014 while inflation-adjusted hourly compensation for most of us rose just 8.7%.
- America’s Net productivity grew 1.33%annually between 1973 and 2014 while hourly worker compensation grew at just 0.20%. Since 2000, the gap between productivity and pay has risen even faster ( 21.6% from 2000 to 2014 vs. just 1.8 % rise in inflation-adjusted compensation).
- Since 2000, more than 80 % of the gap between a typical worker’s pay growth and overall net productivity growth has been driven by rising inequality. Between 1973 and 2014, rising inequality explains over two-thirds of the gap between productivity and worker compensation.
- If the hourly pay of typical American workers had kept pace with rising productivity since the 1970’s, there would have been no rise in income inequality during that period.
- Our rising productivity in recent decades provided the potential for substantial growth in wages for most American workers but this new wealth went instead to the riches segment of society.
- Policies to encourage wage growth must not only encourage productivity growth (the “we must grow our economy” argument) but also restore the link between economic growth wage compensation. Just growing the economy by itself doesn’t fix the economy for most working Americans.
Finally, economic evidence shows that the rising gap between productivity and pay is unrelated to the typical worker’s individual productivity, which has also been rising.
For the full report please go to: http://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/?utm_source=Economic+Policy+Institute&utm_campaign=019280809d-EPI_News_09_04_159_4_2015&utm_medium=email&utm_term=0_e7c5826c50-019280809d-57319413#introduction-and-key-findings
Great points! A quick proof read would help, though. I think you mean ‘parity,’ not parody.
Thanks for the heads up. I need an editor.
Although I agree that the average wage is trending lower than productivity growth, I do not attribute it all to the greed at the top. Those on top are usually going to put profits and accumulation of wealth first. It is easy to justify your own wealth.
The questions I have is that how much of the deviation from the past are due to changes in society, where the average person has less room to negotiate a better price.
Around the 70’s started the trend of the two paycheck family. This relieved the pressure on the primary bread winner to demand higher compensation to achieve the families collective goals. And since a good percentage of is coworkers were starting to have the same two check households, the overall effect led to a small weakness in the labor force. You could not ask for more money, if an equally skilled person would do it for less.
Then small nutritional programs and other social needs programs were strengthened to fulfill the needs of the working poor. Since the eighties there has been rapid growth in the participation of these programs. And since there was an income cap for either full or reduced benefits, This also created the incentive to stay within the guidelines of the programs. This helped to keep the minimum wage low, allowing for more disposable income at the lower levels.
In short a command and control government has created a situation that can be exploited by the “free market”.
Even in periods of full employment where workers had the power to demand more, the labor force was still constrained by the tax code.
Employer would offer better tax free benefits in lieu of higher compensation, this created another series of unintended consequences, where the average person no longer had to shop around for the best heath care at an affordable price, their cost were fixed, the price did not matter. It also led to the disparity between wage tiers, as the working poor started to rely on medicaid to fulfill there health care need.
Today health insurance cost is so high it does not fit rational markets. When I pay my wife and daughters premiums each month, I cringe at how much real health care I have to sacrifice to maintain a high deductible plan.
A few years ago this was reasonable. It has since doubled, Now I spend more on this same plan, than I spend on all health, dental, vision and the previous plan combined. So I am losing ground, and have been since 2010.
Eventually, I will be forced onto the Federal Plan for subsidizes. And that what is wrong with the whole system. With a family income that is around 50% of the nation, I should be able to afford the basic necessities of life, and a few luxuries.
I can not fault Bernie Sanders on his sincerity, I believe him to be honest, and a better choice than Hillary or Obama, but I do not trust the government to determine wealth redistribution, The government can only warehouse people, It is to big to handle individual needs. If you fit in its predefined slots, it may keep you alive.
Wealth follows influence, and influence follows wealth. Redefining wealth does not change the equation. There will always be people on the top, and people on the bottom. The best I can hope for is to defend and expand the middle class, by protecting them from both. That is the best way to ensure a chance for all.
Thank you for your thoughtful comments which deserve a thoughtful response, to follow.
“Although I agree that the average wage is trending lower than productivity growth, I do not attribute it all to the greed at the top… The questions I have is that how much of the deviation from the past are due to changes in society, where the average person has less room to negotiate a better price(?)”
You Proposed the following answer:
1. The trend of the two paycheck family led to a weakness in the labor force’s ability or need to demand higher compensation.
2. Expanded Social service programs and income eligibility caps aid to the working poor created incentives for workers to keep their compensation low so they qualify for government assistance.
3. Employer fixed benefit packages reduced competition for the affordable healthcare, driving up insurance costs since individuals were not “shopping around” for competitive bargains.
Let’s beginning with the last point, fixed healthcare benefits. If these were anti-competitive purchases by employers, the rise in employer costs for these programs would correspondingly raise, not lower, hourly worker benefits. The more an employer pays for workers health insurance the higher the wage compensation is per worker.
Healthcare costs have risen faster than inflation. The reasons for this are many, but the topic is too broad to address here except to say that higher insurance costs led many employers to drop healthcare coverage for their employees. This is a factor contributing to the lower growth in wage compensation relative to hourly GDP. Note, however, that the flood of individuals buying their own health insurance corresponded with a period of high rising premiums, not a lower rates. The collective bargaining leverage of large corporations for competitive health insurance bids was a constraining factor on policy costs.
To your main point, the impact of two paycheck families on wage compensation, is there evidence that the gradual transition to two paycheck families contributed to lower hourly wage compensation? I believe the graph above provides the answer. Let me to explain.
First, the graph represents actual, verifiable economic data over a span of seven decades. It is not a trend graph, but you can easily imagine superimposed trend lines on it. You would have one linear line rising steadily upward and to the right representing hourly Gross National Product (GDP). This is a measure of our nations’ wealth and it has been steadily growing.
The second line represents hourly wage compensation over the same 70 years. This trend line would rise perfectly in step with hourly GDP from around 1950 to 1973, then rapidly (and somewhat erratically) bend over a seven year period before settling into to a straight, but much shallower incline.
Superimposing a trend line on worker compensation data reveals that there was a brief transition period from 1973 to 1980 during the growth rate of worker compensation radically changed. The gap between hourly GDP and hourly worker compensation has grown wider every year since as a result of those changes.
What does this mean? It means the social forces that altered wage compensation began abruptly and remained active over a brief period of seven to eight years. These social forces created a persistent structural change in America’s hourly wage compensation that remains in effect today. It means that long term social trends don’t account for this structural change because they don’t fit the data. Long-term trends present as long slow arches rather than sudden bends in the trend line like the one we see here. It means that the social actions that permanently altered the wage and productivity balance happened quickly, and none of the social trends happening since have had much impact on this altered course of wage compensation.
Your hypothesis, that this change was the result of the rise of two paycheck families, doesn’t seem to fit the pattern. This change would have had to started abruptly in 1973 and end by 1981 at the latest. Of course we know that woman entering the workforce began much earlier and the trend wasn’t yet completed in 1981. It is also difficult to imagine how this phenomenon would cause a persistent structural change in worker compensation over so many decades.
The relatively brief transition, represented in this graph, also rules out other long term trends that are often cited as reasons for lower wage compensation. For example, it’s often said that globalization of our economy accounts for the wage/GDP disparity. It is true that globalization affects employment rates and puts downward pressure on American worker incomes, but the trend itself is a longer, slower process than what is represented in the data for wage compensation. Even the process of shipping business operations overseas took place over a longer period of time and in fact continues today. None of the explanations offered by most economists seem to fit the narrow window in which hourly GDP and hourly wage compensation diverged.
Seven years is a short period of time to bring about such a persistent structural change of this magnitude. Something big must have been happening at the time. What was it? I plan to answer that question in the future blog post that I require more time to research it. Suffice it to say that this was a hyperactive for Nixon era conservatives which gave rise to the conservative movement that swept Ronald Reagan into office in the 1980 presidential election.
Regarding your second point about expanded social services and income eligibility caps creating a disincentive to work, I have addressed this topic previously. It echoes a frequent conservative talking point that there is a giant dependency on social welfare programs. It distracts us from the fact that the growing numbers of people receiving aid to the working poor is a direct result of lower worker compensation. It hides the fact that subsidized assistance to working families allows corporations to have lower labor costs and higher profits. It dismisses the power of higher wages as a motivation for people to seek productive work. It obscures the fact that many companies have found ways to exploit the poor to get rich off taxpayer subsidies. For a fuller explanation please read “Making the Case for a Living Wage.”