Rising Tides, Sinking Wages

The economy seems to be in great shape. The growth rate in 1994 was a
brisk 4.1
percent. Unemployment has been hovering at about 5.5 percent, well below the 6
to 6.5 percent level that many economists (wrongly) consider full employment.
Job growth has been so strong that President Clinton's campaign pledge to
create eight million jobs may well be fulfilled in the third year of his first
term. Corporate profitability has reached postwar records. The stock market is
booming. Inflation is nowhere to be found except in the imagination of central
bankers and bond traders.

We are also witnessing a revival of productivity growth and a celebration of
America's renewed competitiveness, as U.S. products close the quality gap with
imported goods and unit labor costs continuously fall relative to those of
other advanced countries. Some analysts feel that our productivity growth is so
strong and the promise of computerization so great that we are on the verge of
a new, golden economic age.

There's only one problem with this celebration: The living standards of the
broad middle class have remained in continuous decline despite the robust
aggregate performance. This recovery has demonstrated that improved
competitiveness, productivity, and overall economic growth do not necessarily
translate into improved incomes for most families.


In the 1980s, family incomes were stagnant. Only the continued rise in
two-earner families prevented a significant erosion in middle-class incomes in
the face of declining real wages for men. Meanwhile, poverty grew at the bottom
end while income and wealth soared among the top 1 percent. In a decade, all of
the postwar progress toward greater equality was reversed.

hspace=5 HEIGHT=378 WIDTH=267 ALIGN=center alt="Figure 1."

In the 1990s, income trends have been even worse than in the 1980s. Median
family income fell in every year from 1989 to 1993, the last year for which the
Census Bureau has released family income data. This was the only time in the
postwar period that incomes fell four years in a row and the first time that
incomes fell during the first two years of an economic recovery. By 1993, the
median family's income was down $2,700, or 7 percent, from its 1989 level of
roughly $40,000. It will take five to eight years of steady growth to recoup
these income losses--not a likely event. The economy also set records for the
breadth of income deterioration as incomes steadily fell among the bottom 80
percent of families from 1989 through 1993.

While complete data on household incomes are not yet available, it is very
unlikely that these trends have improved since 1993. The real median weekly
earnings of men who work have been falling since 1989, including from 1993 to
1994. (See figure 1.) Even women's median earnings, one of the few
spots in the 1980s, dropped in 1994. The available wage data from early 1995
suggest that wages for both men and women have continued to lag behind
inflation over the last 12 months.

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Part of the problem is that the rate of return to capital--profits,
dividends--has surged to postwar records and thereby dampened wage growth. The
larger part of the problem is that the continuing growth of wage disparities
has demonstrated that even though average productivity and average wages may be
increasing, the wages for the vast majority can still be falling. (See "Working
Harder for Less"
) src="/tap_images/print/V6/images/23mishf2.gif" WIDTH=255 VSPACE=5 HSPACE=5
ALT="Figure 2."

Productivity (output per hour worked) has grown 25
percent since 1973, a weak performance by historical standards, but quite
enough (about 1 percent a year) to enable all workers to achieve real wage
growth. In fact, average hourly compensation has roughly tracked average
productivity, at least until recently. But that "average" is composed of a
small part of the workforce at very high pay whose earnings are increasing
while the bottom 80 percent see their pay falling. Hourly compensation of the
median worker was stagnant over the 1970s and 1980s and has been declining in
the 1990s. The median male has seen his hourly compensation fall 1 percent
annually since 1979.


Growing wage inequality is not the inevitable consequence of technological
progress. Most wages have been falling despite rising productivity for one
simple reason. Workers--union and nonunion, college- and noncollege-educated,
white-collar and blue-collar--have lost bargaining power relative to their
employers. Corporate America today has the power to respond to increased
domestic and global competition by cutting labor costs. Public policies have
generally accommodated or reinforced this effort, by failing to pursue full
employment, fair trade, higher minimum wages, or renewal of the labor movement.

The failure of rising productivity to raise living standards is something new
in the postwar American experience. As Lawrence Chimerine of the Economic
Strategy Institute points out, virtually every macroeconomic model has been
predicting far faster wage growth than ever materializes. At the peak of an
economic recovery, one expects workers to be able to approach their bosses with
propositions such as "I need a 5 percent wage increase or I'll get another
job." This has not been happening in the current business cycle, even among the
managerial-professional workforce whose unemployment is only 2.5 percent. The
steady growth of temporary employment, which accounts for about 15 percent of
job growth in this recovery, and the continued use of other forms of contingent
work indicate that broad segments of the workforce have little power to shape
their terms of employment. According to the Bureau of Labor Statistics (BLS),
early 1995 saw the lowest compensation growth in two decades. This must be a
curious phenomenon for our central bankers who have been doing their best to
slow the economy lest wages accelerate and inflation take off.

In our recent book, The State of Working America, 1994-95, Jared
Bernstein and I attribute growing wage inequality primarily to two clusters of
factors, each of which can explain about one-third of the phenomena.

Globalization and Service Employment. The combined effect of
globalization (including the trade deficit, low-wage competition, immigration,
and foreign direct-investment trends) and the continued expansion of employment
in the lowest-paid portion of the service sector together explain at least a
third of the wage problem. BLS attributes 25 to 30 percent of the growth of
wage inequality to sectoral shifts in the pattern of employment alone. In
addition, import pressure has lowered wages for many middle- and low-wage
industrial workers, and undercut the wages of workers generally. Only a few
ideologues in the economics profession, particularly near important
congressional votes on trade policy, deny that expanding trade significantly
depresses wages for noncollege-educated workers.

These factors are all influenced by policy decisions--by omission or commission.
For example, the shift to service employment would be far less consequential if
health care and pension benefits were not so tightly linked with one's
particular job but were universally provided. A service-sector job would not be
a sentence to wage reductions if America had stronger unions, or fuller
employment. The wage disparities between manufacturing and services are far
smaller in other industrial countries where market forces have less free rein.

An Institutional Collapse. The other prime culprit is the weakening of
labor market standards and institutions that empower workers. The erosion of
the minimum wage, a nearly 30 percent drop in value from its 1979 level, has
particularly affected wage levels of working women. Deunionization and the
weakening of union bargaining power has had a particularly adverse effect on
noncollege-educated men. This erosion of wage-setting institutions can explain
roughly another third of the recent wage deterioration among workers. Other
factors that are harder to quantify have also had an impact: deregulation,
privatization, and the growth of contingent work--and these also reflect the
policy climate.


Big government is a popular scapegoat for the erosion of living standards. The
Republican House Majority Leader, Dick Armey, has claimed that people are
working harder and getting less because the government is taking a bigger bite
out of their paycheck. In reality, it is pre-tax pay that has collapsed.
According to the Congressional Budget Office, the effective federal tax rate on
the middle class was stable or declining in the 1980s.

Moreover, the projections for 1995, which include all of the effect of the
early Clinton budgets, show tax rates declining among the bottom four-fifths
while rising among the best-off fifth. Even the conservative National Tax
Foundation reports stable tax rates over the 1980s. If anything, government was
stable or shrinking--as measured by shares of total employment or expenditure or
by regulatory costs--since 1979 when the wage implosion originated.
Unfortunately, according to a recent Business Week poll, the public
seems to believe the big government, high taxes story. This only proves that
"Big Lies Frequently Told in Many Forums" is still an effective communications

A related, and disingenuous, claim is that large fiscal deficits are the cause
of income problems. At most, deficits may be a factor if they somehow eroded
investment and thereby productivity growth. But, we have already seen that the
productivity growth that did occur was not shared with most workers. Even more
damning is that the productivity slowdown preceded the era of large structural
fiscal deficits by nearly ten years. The claim that fiscal deficits have shrunk
workers' paychecks is without foundation.

Among economists and editorial writers the most widely cited explanation of
widespread wage deterioration and growing wage inequality is that technological
change has raised the demand for skills so that the wages of more highly
skilled and educated workers have been bid up and the wages of other workers
have suffered because there is less demand for them. Curiously, economists also
acknowledge that there is very little direct evidence for the technology story
and that their belief is based on eliminating competing explanations and
putting a technology label on what they cannot explain. (See David Howell, "The
Skills Myth," TAP, Summer 1994.)

It is implausible to rely on an explanation that describes three-fourths of the
workforce--those whose wages have been declining since 1979-as "low-skilled." It
is hard to imagine the "bidding up of skilled workers' wages" as an apt
description of a process that has lowered the real wages of male white-collar
and college-educated workers continuously since 1987. To believe the technology
story, we must also believe that a technological revolution is dramatically
affecting our wage and employment structures but somehow fails to raise
productivity growth enough to improve living standards. And, of course,
technological change in the workplace is not new. For the technology story to
make sense, technology has to have had a greater impact on labor markets in the
1980s and 1990s than in earlier periods, either through a faster rate of
introduction or due to new types of technologies. My recent research with Jared
Bernstein has shown that no such "acceleration" has taken place.

Absent strong countervailing forces, we should expect wage inequality to grow
and wages to continue to fall for large segments of the workforce. Conceivably,
productivity growth could accelerate so significantly that even smaller shares
of a larger pie would mean more pie for all. But this hope rests primarily on
conjectures of an eventual payoff to computerization so huge that it would
offset all the pressures leading to increased inequality. Put me down as a

A second possibility is for so many new college graduates to enter the labor
market that college wages fall relative to those of noncollege-educated
workers. This is an unlikely scenario because, even though a greater proportion
of young adults are completing college, the size of the college-going-age
cohort is shrinking, limiting the absolute growth of college graduates. A more
plausible scenario is that wage inequality continues to grow or, at
, stalls.


In any event, nothing in the Republican economic program will reverse or
forestall continued wage erosion and the accompanying pressures on family
incomes. The macroeconomic effect of balancing the budget and reducing the
deficit will be to slow economic growth over the next ten years. Any long-term
effect of deficit reduction on productivity is uncertain, slight, and at least
a decade away. Clinton's Council of Economic Advisers estimated the payoff for
their very sizable deficit package at two-and-a-half percent more consumption
after twenty years, without considering the income losses from the initially
slower growth. The Republican growth program of deregulation and tax reduction
will, at best, increase jobs and productivity slightly but do nothing to
upgrade the quality of jobs or to translate productivity growth into
broad-based wage gains.

The issue of wage growth will thus be with us for a long time, and it is time
the nation and politicians started focusing on it. We will not make progress
unless we can sustain the necessary conditions for wage growth. That means the
Federal Reserve Bank must adjust its views of the "natural" rate of
unemployment and cease creating a recession at the first signs of robust
growth. Public investments in skills, infrastructure, and technology are in
order to maintain productivity growth. The character of growth must change as
well. Public policy needs to inhibit financial speculation and corporate
strategies driven by short-term profit, in favor of production strategies that
rely on broadly skilled workers and widely shared rewards. Trade policy,
including international labor and environmental standards, must be used to
shape global capital and trade flows and inhibit the "race to the bottom."

Most of all, we need to re-empower workers and change the dynamics of wage
setting. Part of the solution is a significantly higher minimum wage, which
will greatly help the bottom half of the income distribution. Another part is
to enable workers to choose unionization and collective bargaining, especially
in the service sector where a wage push from below may be our only hope for
forcing employers to become more efficient and to generate productivity growth.
New forms of representation, such as works councils and occupational
associations, may be needed to achieve a wider empowerment of workers. Greater
economic security through training and education, along with greater health
security and pension mobility are valid policy in their own right, and can also
help change the dynamics of wage bargaining.

Understanding these income problems is key to understanding the current
shredding of our social fabric as well as the elections of 1992 and 1994.
Moreover, policies to regenerate broad-based wage growth may be the key to
political success in 1996 and beyond. In fact, this theme is already central in
the rhetoric of Secretary of Labor Robert Reich and House Minority Leader
Richard Gephardt.

However, before we can pursue appropriate remedies, we first need broad
agreement that the erosion of living standards is a problem-indeed, the
problem-that can be addressed through policy. That recognition, unfortunately,
is still almost totally absent from political discourse. o


Figure 1. Median Hourly Wages for Men and Women, 1989-1995

Median weekly earnings of full-time working men have fallen
steadily since 1989, while women's wages--a bright spot in the
1980s--dropped in 1994.

Source: Authors' analysis of Bureau of Labor Statistics

Figure 2. Working Harder for Less

It's true that productivity and average wages are increasing, but
the wages for the vast majority of Americans are still falling.

Source: Authors' analysis of Bureau of Labor Statistics

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