Just in case you missed it, the central economic problem of our time was revealed on January 28 at 8:30 a.m.
On that chilly morning, the government released two reports that, taken together, capture a critical imbalance embedded in our economy. We learned that the nation's gross domestic product, our most comprehensive measure of economic performance, grew 4.4 percent last year, the best year for GDP growth since 1999. A second report, on employers' costs, revealed that inflation-adjusted wages, on average, fell slightly for the year, the first time that's happened in more than a decade.
Thankfully, the jobless recovery is behind us. In 2004, we added employment in each month, the first year that's happened since 1999. But now we've got a new problem: For many workers, real wages are falling.
The overall average, as noted, slipped only slightly, by 0.2 percent. But this overlooks the evolving distributional dynamics: Real hourly wages were flat or falling for the bottom 70 percent of women and 80 percent of men. Even the real hourly wages of college-educated workers fell by 1 percent. (Sylvia Allegretto, Isaac Shapiro, and I examine these wage trends in detail in a forthcoming paper.)
Only those at the top of the wage or education scale caught a break: The 95th percentile hourly wage was up 1 percent, as was the wage for those with advanced degrees. It's also the case that average compensation -- including fringe benefits -- was up last year (by 1.1 percent), but that was due to rising health costs. Such increases neither boost take-home pay nor help the 47 percent of the workforce without employer-provided health care.
While we're on the subject of burgeoning inequalities, another tidbit in the GDP report warrants mention. Personal income got a huge boost in the fourth quarter from a $33 billion dividend payout to Microsoft shareholders, the largest such payout in history. This doesn't boost the GDP (it's scored as a reallocation from profits to dividends), but it shows you that there's some money out there. It's just sloshing around at the top.
Big dividend payouts are great for the small percentage of households that live off their stock portfolios. But for that the majority of families that depend on their earnings, sliding hourly wages mean that they must work more hours if they're going to lift their incomes. That's possible now that we're adding jobs, but the rate of employment growth is too slow. While many analysts crowed about the fact that payrolls expanded by 2.2 million over the course of 2004, the growth rate that year -- 1.7 percent -- was well below the historical average of 2.9 percent. Had that historical rate prevailed, we would have added another 1.4 million jobs over the year.
This problem showed up in the GDP report, too. As my Economic Policy Institute (EPI) colleague Josh Bivens reported, by this point in the average recovery, total compensation was up 17.5 percent in real terms; in this one, it's up 7 percent.
So we've achieved respectable overall economic growth, but it's hardly feeding into wages. What's going on?
The late, lamented jobless recovery is part of the explanation. There's still residual slack in the labor market, and thus little pressure on employers to bid up wages. The situation was roughly similar at this stage of the 1990s expansion, but real wage trends were soon to reverse as we began the trek toward the full-employment conditions that prevailed at the end of the last cycle. It's possible that we could eventually get back there again, but that's unlikely to occur in the near term. Even the congenitally optimistic White House economic forecasters are expecting 175,000 jobs per month in 2005, 40 percent below the historical average at this point. More importantly, with the Federal Reserve busy raising interest rates, the path back to full employment is even steeper.
But there's an explanation for these embedded inequalities that goes deeper than near-term trends. The economic dynamics and policies that lead to faster growth are in place, but those that ensure that the growth is equitably distributed are missing. Our leading policy-makers know how to use monetary and fiscal policy to boost growth, but when it comes to distributing the fruits of that growth, they're either clueless or uninterested.
It was not always thus. We used to have a set of institutions and policies in place -- unions, minimum wages, a commitment to full employment, a stronger safety net -- that promoted a more equitable distribution of income and wealth. But somewhere along the way, conservative forces built a consensus that these institutions were killing the golden goose of market outcomes, which, once unfettered, would deliver prosperity for all.
Are such institutions compatible with global capitalism in the 21st century? We (EPI President Lawrence Mishel and I) consider this such a critical question that we plan to spend our next few “Econ Chamber” columns discussing it. In a sense, the answer to this question gets to the heart of the debate for the soul of the Democratic Party. It determines whether to promote centrist New Democrats who accept the dominant consensus or more traditional Democrats who challenge it.
It may seem like a stretch to draw all this out of a couple of starchy government statistical reports before 9 a.m. on a Friday. But sitting here a few days later, I'm convinced that's what the numbers are trying to tell us.
Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.
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