The most recent employment report brought mixed news. The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages, so policymakers should be patient in reversing attempts to stimulate the economy. Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize.
I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.
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Before getting to “the rest of the story,” what is the market-based explanation for stagnating wages? The most popular explanation involves the forces of supply and demand combined with an assumption, supported by the evidence, that wages are downwardly rigid, i.e. wages rise much easier than they fall.
When a recession hits and the demand for labor falls significantly, there is substantial downward pressure on wages. But when wages are downwardly rigid, they stay constant instead of falling. When this happens, an improving economy will not cause wages to increase until the forces pushing wages downward are overcome.
As Mary Daly and Bart Hobijn say in a recent Economic Letter for the San Francisco Fed, “Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts.”
Essentially, the demand for labor must increase relative to supply until the “pent-up wage cuts” are overcome. But demand is growing slowly, and the supply of labor is increasing as discouraged workers return to the labor force with improving economic conditions, so increases in wages could still be some time away.
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The idea that an improving economy will overcome the problem of stagnating real wages and rising inequality that has existed for decades is suspect. Why should this time be any different from the past? Sure, improvements in labor demand relative to supply could make some difference, and a tight labor market is certainly better for the working class than a labor market will high levels of unemployment and a large number of discouraged workers, but should we suddenly expect workers to receive a higher share of national income – income that has increasingly flowed to those at the very top of the income distribution – once we reach full employment?
Until workers recover the bargaining power they lost with the decline of unions and the rise of globalization, it’s hard to imagine a reversal of the forces pushing us toward stagnating wages and ever higher inequality. It’s not market forces alone that are determining the split of income between those at the top of the income distribution and those below, it’s also the institutions that determine who holds the cards in negotiations over wages. Presently workers are not faring well.
To me, what we are seeing is reminiscent of the “Just Price Doctrine” popularized by St. Thomas Aquinas in the Middle Ages. According to this view, “The just wage meant that rate of remuneration which was required to enable the worker to live decently in the station of life in which he was placed; and thus, if one may so express it, such a wage, representing reasonable decency, was made a first charge on industry.”
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Thus, so long as workers have a car, a TV, a cellphone, and a roof over their heads, what is there to complain about? From the point of view of the owners and managers, they are being paid reasonably decently, so what’s all the complaining about? In fact, according to a Pew survey, “Most of America’s rich think the poor have it easy.” An owner or manager, on the other hand, must be paid vast sums in order to “live decently in the station of life in which he was placed,” sums that have been increasing over time (owners and managers of large firms are paid much more than their counterparts in other countries, an indication that something beyond market forces is at play).
Solving the problem of lack of bargaining power that puts workers at the mercy of the “decency” of those they negotiate with is not easy. The ability of traditional unions to negotiate over wages has been undercut by globalization, technology, and the threat of offshoring, though unions – to the extent they still exist – do retain some value as a source of political power.
But one thing is clear. So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality, so long as we fail to recognize that workers need a level playing field when bargaining over wages, inequality will continue to be a problem.
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