Our economy is now five years into an economic recovery, yet the wages of most Americans are flat. For the entire period between 1979 and 2013, median worker wages rose by just 7.9 percent while the economy’s growth and productivity rose 64.9 percent.
The top one percent has made off with nearly all of the economy’s gains since 2000.
Is there nothing that can be done to improve this picture?
To hear a lot of economists tell the story, the remedy is mostly education. It’s true that better-educated people command higher earnings. But it’s also the case that the relative premium paid to college graduates has been declining in recent years.
If everyone in America got a PhD, the job market would not be transformed. Mainly, we’d have a lot of frustrated, over-educated people.
The current period of widening inequality, after all, is one during which more and more Americans have been going to college. Conversely, the era of broadly distributed prosperity in the three decades after World War II was a time when many in the blue-collar middle class hadn’t graduated from high school.
I’m not disparaging education—it’s good for both the economy and the society to have a well-educated population. But the sources of equality and prosperity mainly lie elsewhere.
Three big things have changed in recent years that better explain why this recovery is accompanied by flat wages.
First, the financial collapse is still exerting a drag on the economy. Until the crash of 2008, ordinary families whose incomes had not kept pace with the cost of living had been borrowing to sustain their consumption. Americans ran up credit card debts, borrowed to attend college, and above all borrowed against their homes. All of that camouflaged stagnant earnings.
But the crash ended the borrowing binge. Without increasing debt (which is the wrong remedy), household purchasing power is too low to stimulate a strong recovery.
Secondly, corporate America got increasingly into the habit of hiring people on a temporary, part time, or contracted-out basis. Traditional payroll jobs became harder to come by. The idea that employers had some reciprocal loyalty to their workers became a relic.
A small fraction of Americans turned this new insecurity into a plus, becoming entrepreneurs. But for every genuinely successful Internet startup and every truly joyous freelancer, there are dozens of people for whom working as a “consultant” is nothing but disguised unemployment.
Third, the sources of labor bargaining power have been weakened. Those included strong federal labor-market regulation and trade unionism. In the absence of these, corporations and investors are able capture the lion’s share of the economy’s productivity growth.
So, are we just stuck? Do the characteristics of the new economy simply doom us to flat incomes for most people and stratospheric gains for the few?
Actually, several things could be done to restore a better distribution of the economy’s productivity growth. But most of them are outside mainstream political debate.
A good historic parallel is the burst of deferred growth that came with World War II.
In 1940, unemployment topped 13 percent and many economists argued that technology had displaced so many human workers that this was the best the economy could do. But by 1942, unemployment had vanished.
In the intervening two years, workers did not suddenly become smarter, better educated, or more diligent. Rather, their government borrowed money and taxed the wealthy in order to massively invest in fighting World War II.
The war, in turn, became the greatest accidental economic stimulus program ever. As a side effect, wartime spending produced scientific breakthroughs and technological gains as well as more purchasing power.
Today, we don’t need another war. But we do need major investment in decaying public infrastructure and in transition to a green, sustainable economy.
The “good war” also served as a labor market policy. War production plants had to pay good wages and defense contractors had to accept unions if workers voted them in.
The wartime economy propelled America into the postwar boom and laid the groundwork for the postwar middle class. After the war, we doubled down with social investments such as the GI Bill and major infrastructure projects, as well as minimum wage regulation.
We could do it again. All that stand in our way are a lot of bad economics and a consensus of the elites that cutting deficits and rewarding speculators take precedence over rebuilding the country. The obstacles to restoring broad prosperity are not economic. They are political.