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What’s up with wages? Nothing, and that’s a problem (not a puzzle)

| Monday, September 17, 2018

Increasing inequality is a pressing problem requiring serious research and vigorous debate as we strive for policies that improve people’s opportunities and outcomes. One direct way to tackle this challenge is to confront the problem of pay, especially in the United States, where our public culture has long correlated hard work with personal worth and our public policies have wedded social benefits to employment via tax credits, health care insurance and pensions.

In three columns collectively titled “Just Wages,” I’ll address some problems and promises associated with pay in the contemporary U.S. “Just Wages” carries a double meaning here. First, the focus will be solely on wages. Though the challenge posed by inequality is complicated and often seems intractable, we can go a long way toward solving it by simply enlarging people’s paychecks. How we go about that leads to the second meaning, because arguing to raise wages invites disputes over defining whether and when any given wage is just. My aim here is to begin a fruitful conversation on “just wages.”

The numbers are shocking. Within the United States, the average household income for the top 10 percent was about $313,000 in 2015, nearly ten times the $34,000 for the remaining 90 percent. That gulf has been growing for decades, with the top one percent now capturing 22 percent of all income, more than doubling their portion since the 1950s. Meanwhile, CEOs of major corporations now make 361 times what their typical workers earn (in 1980 it was less less than 50 times more).

I can already hear these alarming figures being argued away by my conservative and libertarian-leaning friends. Don’t contrast Americans of different incomes, they argue, as that only leads to class envy of the successful. Instead, measure households over time, because as long as their own incomes are growing, Americans don’t care how rich their bosses are. A rising tide lifts all boats — canoe and cruise ship alike.

The problem is that most Americans who don’t own a yacht have been drowning. For the past four decades, real median wages in the US have been flat, as a typical worker in 2016 took home only one percent more in weekly pay than one in 1979. Even worse, those in the bottom 10 percent actually took home five percent less. You would think that such a foundational fact — four decades of flat and even declining wages — might shape public discussion of the economy. Sadly, though, that is not the case.

For those in charge at our nation’s capital, the health of the economy is measured instead by crude figures like GDP (gross domestic product) and the unemployment rate, which are regularly updated, religiously analyzed and relentlessly repeated. If the former is up and the latter is down, we’re assured, then the economy is doing well. As President Trump recently tweeted, “In many ways this is the greatest economy in the HISTORY of America and the best time EVER to look for a job!”

The unemployment rate is indeed at its lowest level in nearly two decades, a good thing no doubt, but that tells us nothing about the nature of the jobs being created, including how much they pay. And the government’s own numbers provide more sobering news: for the vast majority of American workers, real wages actually declined over the past year. If it’s the best time to look for a job, it’s apparently not the best time to earn a living from a job.

Fortunately, many in the media have been raising the issue of non-raising wages. Unfortunately, the responses from many mainstream policymakers and academics suggest widespread bafflement at this seeming violation of the iron law of supply and demand. As the Washington Post reported, “The fall in those wages has alarmed some economists, who say paychecks should be getting fatter at a time when unemployment is low and businesses are hiring.” Similarly, a Chicago Tribune headline summarizes the collective bewilderment: “Weak pay growth puzzles Fed chief, just like everyone else.”

I’m not puzzled by the flatness of wages despite our tight labor markets, because wages have been stagnant for decades as the unemployment has risen and fallen repeatedly. Instead, I’m perplexed by the way many economic experts cling to abstract theories of how markets are supposed to work in spite of strong evidence to the contrary. “This is odd and remarkable,” one economist told the press, while another described the persistence of flat wages as “one of the big economic questions of our time.” Surely the bigger question is why so many economists find a forty-year phenomenon such a “mystery,” as Federal Reserve Board chair Jerome Powell has repeatedly termed it.

To be fair, many economists from across the political spectrum have been offering theories for the flat wage phenomenon, but too many give explanations that, frankly, fall flat, such as that low productivity growth is preventing employers from raising pay (in recent decades wages haven’t risen in years of high productivity growth either), or that employers must be compensating workers via non-wage benefits, even if they admit to not having data showing that. It often seems like the evidence is forced to fit the theory, rather than the theory chosen that best explains the evidence.

The fact is that wages are a function of not only markets and policies, but also the wider cultural norms and values that inform those policies and markets. Over the past forty years, as economic transformations ushered in greater individual insecurity and increasing societal inequality, our elected officials, policymakers and academic experts apparently developed an economic amnesia regarding how to implement — and apparently even imagine — structures and systems to promote widespread prosperity. It wasn’t that long ago when Americans confidently embraced that challenge, which is something I’ll address in my next column.

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