The Fruits Of One's Labor
Max B. Sawicky
May 13, 2005
The economy has not been much of a story lately. Cassandra-like voices warn of ominous, unsustainable trends in budget and trade deficits, but the public doesn't get very excited because no painful consequences have reared their ugly heads. Yet. More prominent is the jobs situation, which to the man on the street may seem to have righted itself. The latest report of the Bureau of Labor Statistics shows an addition of 274,000 jobs in April, a good number. Regardless of whether or not you think the president's tax cuts worked, the economy is growing. So how good is it for you?
As usual, it depends on where you sit. The standard of living for most working-age people depends on their rate of return on hours worked. Economists say workers' compensation (wages plus fringe benefits, chiefly health insurance) depends on productivity, usually measured as total output per hour worked. The more workers produce, the more bosses will pay. But economists can be wrong, and this is one of those times. With rising productivity bosses can pay more, but will they pay more? Do they pay more?
For the past 30 years productivity has grown well ahead of compensation. This is so for both average and median pay levels. Since 1973, productivity has grown by over 70 percent. Median and average pay have grown by, respectively, 13 and 38 percent. The gap between what could be paid and what is paid has gotten larger over this entire period. We are talking long-term trends here that do not depend on recent history or the current regime, so much as the chronic disadvantage workers have had vis-à-vis employers.
Lawrence Mishel and Jared Bernstein of the Economic Policy Institute took a more focused look at the current economic situation. Over the past three and three-quarter years, productivity grew by 4.1 percent, while compensation grew by 1.5 percent (both inflation adjusted). In previous, analogous points in the business cycle, pay grew more rapidly—1.8 percent on average—and the gap between pay and productivity was smaller. That comparison does reflect badly on the current regime, but the longer-term trend indicates the problem is bigger than Republicans running all three branches of the federal government.
Not surprisingly, less wage growth has been accompanied by more profit growth. The share of Gross Domestic Product devoted to labor compensation, after rising smartly up to about 1970, has stagnated and fallen since then. The chart below tells the sad tale. The upshot is that prosperity isn't trickling down very well, which you probably knew.
Short of sending out night riders to terrorize reluctant employers, we need some way to prod wages upwards. We know from the productivity surplus that increases are feasible—that they would not cause business insolvency. We would like employers to be chasing workers, bidding up wages. This takes us to the present state of the labor market.
Jobs have increased, but the unemployment rate is still 5.2 percent—well above the 4.0 percent levels experienced in the late 1990s. Moreover, 5.2 percent is a gross understatement in light of the fact that many who left the labor force after 2001 and have yet to return are no longer counted as unemployed.
Lower unemployment would cause greater difficulty in hiring, and create a greater need for bosses to raise wages. Two of the more important levers for higher employment are budget deficits and monetary policy. Deficits are plenty large right now, but their composition leaves much to be desired. From the standpoint of stimulating consumer spending, the tax cuts underlying the deficit have gone to those who, relatively speaking, are less likely to spend much of the proceeds.
It happens that their idea of normal does not serve the interests of the vast majority of working people. We need a regime change in both parties, as far as thinking about this issue is concerned.
Another important lever is the length of the work week. Changes in tax and health care policies could make it attractive for employers to hire more people, rather than working their existing employees for extended hours. If employers are reaping a dividend because wages fall behind productivity, it follows that they could afford to allow work hours to fall with less than proportionate—or no—reduction in pay. The demand for labor could grow. Productivity per hour in this scenario might even increase.
A sidelight of the productivity numbers with current interest is the role of productivity growth in the Social Security debate. In the "intermediate scenario" of the Social Security Trustees' report that gives rise to projections of Trust Fund exhaustion in 2041, the assumption on productivity growth is 1.6 percent. As noted above, over the past three years the average was 4.1 percent. The average over seven previous business cycles was 2.5 percent. Under the Trustees' "optimistic" scenario, wherein the Trust Fund maintains positive balances for the next 75 years, assumed productivity growth is just 1.9 percent.
The EPI numbers are not strictly comparable to those used for the Trustees' assumptions, and other factors come into play, but it is hard to escape the conclusion that the Trustees' intermediate scenario is unduly pessimistic, and the program is in better financial shape than it is ordinarily portrayed.
The Social Security program is not an investment program. Because it is pay as you go, in effect its "rate of return" is the growth of its revenue source—payroll taxes. Higher wages mean higher payroll taxes, but insofar as wage inequality grows, more taxable payroll spills over the payroll tax cap—presently $90,000—and less revenue goes into the Trust Fund than otherwise would. In prior years, 90 percent of wages were subject to the payroll tax for Social Security. By now, it is only 84 percent.
Broadly speaking, the rate of return on workers' prime asset—their labor—is bleeding on three sides. On the one hand, pay does not keep up with productivity. Second, failure of payroll tax revenues to keep pace with wage growth limits proceeds to the Trust Fund. And third, the Bush Administration seeks to divert payroll tax contributions from the finance of a guaranteed retirement insurance benefit—Social Security—to an ill-conceived, jury-rigged investment scheme.
Realizing the fruits of one's labor has always been a political struggle, not some inescapable economic market outcome. People don't need to settle for normal and not-good-enough, but without a fight, that's what we will get.