wage stagnation explained

Regular people (i.e., those who are not professional economists) only know if they are in a  recession or not when they read the newspapers or watch TV. We can't know what the whole economy is doing, but are only able generalize from our informal collection of anecdotal evidence about our own situation and those of the people who we know. As a result, economic conditions as understood by the economists do not always line up with everyday experience. 

A case in point is the "Great Recession." Technically speaking, it lasted only a year and a half. (The retroactive dates of the various twists and turns of the business cycle are traditionally set by the National Bureau of Economic Research. This is not a government agency, but a widely respected non-profit whose members are economists.) According to the standard measures, the most recent recession lasted only until December of 2009; since then the unemployment rate has declined by half, from 10% to 5%.

Yet many individual economic actors (otherwise known as "people") do not seem to feel like their economic situation has improved. As late as March 2015, one poll reported that 57 percent of Americans still believed us to be in a recession. The reason for the disjunct between the official statistics and the ground-level economic experience are many and varied: they include the limited reliability of the unemployment rate as it is currently tabulated, the decline of manufacturing in the United States and the fact that most of the new jobs are are in the comparatively lower-paying service and retail sectors. The result, however, is that even as we are being told that there are more jobs than ever, the times still do not inspire much confidence, hope for the future, or support for the American Dream.

In my view, the concept that supplies the most effective intellectual handle by which to understand what is happening is that of wage stagnation. As an economic actor, the individual worker doesn't really care how many jobs there are, but only how easy or hard it is for him/her to get a position and how much it will pay. When wages are stagnant, the amount of money that people are making is not going up, regardless of how many jobs there are.

It is important to recognize, however, that wage stagnation is not merely a twenty-first century phenomenon. As you can see by the graph above, wage stagnation has contributed significantly to economic inequality since 1979. While middle wages have been flat in this period and lower wages have actually declined, those at the very top of the scale have seen their incomes increase. The result is a rise in economic inequality. (Even greater is the disparity between income earned from wages and that derived from capital investment, which Thomas Piketty exhaustively documented in his 2014 book Capital in the Twenty-First Century.) 

Source: Washington Post

Source: Washington Post

In my view, it is wage stagnation that is the single most important domestic political factor since the 1970s. The declining level of affluence and of social expectations is clearly a major cause in increasing racial tensions, the backlash against liberalism, the rise of conservative "supply-side" ideology and the concomitant slide to the right by Democrats since Clinton, if not Carter. On this interpretation (which I hope to advance in my next book), economic conditions effectively caused the long-term American move toward conservatism. In his excellent book The Unwinding, journalist George Packer uses the individual stories of several particular people to make a similar point: that declining opportunity in the United States has effectively unravelled the nation's social fabric.

But how and why does wage stagnation happen? Typically wage growth is tied to productivity and economic growth. If advances in technology or procedures allow the same number of workers to produce a larger number of products, then the firm is spending the same amount on labor but actually getting more products to sell. This should lead to increased revenue. (Of course, that result will only come about if the level of demand keeps up with the advances in productivity. Otherwise, workers will be producing more goods without an increased number of consumers to buy them. In that scenario, the results of increased worker productivity will be layoffs rather than raises. That is why both worker productivity and economic growth are required for wages to rise consistently.) But this dynamic has broken down. Since the 1970s, as described in the graph below, productivity has increased while wages have not.

The rise in productivity without a corresponding rise in wages suggests that wage stagnation is not driven by blind economic forces, but by specific decisions made by particular people. Obviously, those who run the firm decide whether or not to distribute gains in the form of floor-level employee raises, executive pay increases, or profits. But conventional understanding suggests that these impersonal economic forces should keep the CEOs honest. If there are fewer available workers, then employers will have to pay more in order to attract them and to keep the ones that they have. The result will be steadily rising wages.

So the existence of wage stagnation during a period of high employment is a bit of a puzzle. Jared Bernstein, a liberal economist at the Center for Budget and Policy Priorities, offered his explanation for this trend in a recent article in the Washington Post. The bottom line, he argues, is that "raising pay is simply not part of the business model of American employers. They will not do so until they’re absolutely forced to by a labor market that’s much tighter than what we’ve got today." Employers, say Bernstein, would have preferred to have actually lowered wages during the recession. Even in today's America, however, that would provoke outrage. (Notice that this is another example of culture and individual decisions trumping the laws of supply and demand. Rarely, but sometimes, this phenomena works to the benefit of the worker.)

Your employer is paying you $20 an hour. Because of weak demand, she’d like to pay you $18 an hour, but she can’t because it would piss you off too much to get a smaller paycheck (it’s not your fault the banks blew up the economy!). Now that demand is coming back, she’d like to pay you $19, then $19.50, and finally $20. But, of course, you’ve been at $20 the whole time, so that’s why you’re still there.

Notice that in Bernstein’s scenario all of the decisions are made by management. There is no counter-offer on the table from the workers; they can take what employers give them or leave it. This is because by 2016 the majority of such decisions take place against a backdrop of declining worker power. This lack of influence is the result of, again, not impersonal economic forces (remember the high employment rate), but of specific decisions and policies, many of which are political in nature. The stubbornly low minimum wage puts very little upward pressure on pay rates, and Congress and the states have been making things harder for labor unions since as far back as the Taft-Hartley Act of 1947.

 Political determinations have empowered management over labor to the extent that the American ideal of upward mobility is becoming a sham. They have even overwhelmed the economic laws that management typically invokes to justify their various actions. In such a scenario, politics offers the most logical arena in which to address the significant problem of wage stagnation. Working hard and playing by the rules is not enough.