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POLICY LEVERS AS TOOLS FOR ECONOMIC RECOVERY

March 8, 2015

POLICY LEVERS AS TOOLS FOR ECONOMIC RECOVERY

A few weeks ago economist Elise Gould of the Economic Policy Institute wrote and published a piece on how wages either stagnated or fell across the board in 2014 – with one notable exception – one (and the reasons for it) I will discuss later.

She prefaced her conclusions with statistical findings by rather finite decile measurement of employment, matching such deciles with educational attainment, among other such statistical assurances for validity. Her findings are illuminating and I agree with most of her conclusions.

She notes, for instance, that we have been adding jobs at a respectable clip, but correctly notes that it has not been accompanied by decent wage growth. Indeed in most deciles measured there has been either stagnation or even a fall in wage growth. This is not in accord with standard economic theory, which holds that employment pickup and wage growth move in tandem. The question then becomes: Why isn’t this happening (aside, of course, from the general greed and penchant of employers to hold down costs)? If employers need more workers and workers are becoming in shorter and shorter supply, why doesn’t the law of supply and demand kick in and cause employers to offer substantially higher wages in order to attract needed workers from a shrinking work pool?

Gould postulates that the labor market is not what it seems, that while the unemployment rate has come down over the past few years, there are still some 5 or 6 million workers who are missing, missing because of weak job opportunities, and that nothing saps workers’ ability to negotiate effectively for higher wages like a bunch of willing replacements lined up outside their bosses’ doors and the inability to leave to get a better job. To put it plainly then, there is no shortage of willing workers and thus no supply and demand problem from employers’ points of view – hence the continuing stagnation or even reduction in wages paid.

She noted one exception to her general decile to decile findings, and in a surprising decile measure. One would think that the most likely increase in wages would go to deciles where the workers measured had the most education. Not so; real wages at the top of the wage distribution fell – by 0.7 at the 90th percentile and 1.0 percent at the 95th percentile – and get this – Real wages FELL for workers with a 4-year college degree – a drop of 1.3 percent – and EVEN MORE for those workers with an advanced degree – a decline of 2.2 percent! (I chalk the latter up to wholesale use of adjunct faculty in educational institutions and/or employer bullying, or both.)

If the increase in wages did not occur in the most educated deciles, then where did it occur, and why there? Unlike the rest of the wage distribution, wages actually increased at the 10th percentile between 2013 and 2014. Why in the world would wages increase at the bottom of the pile while stagnating or falling everywhere else? Here’s the answer: Wages for the bottom of the pile increased because there still exist some labor standards that provide wage protections, namely, because some 18 states making up 57 percent of the workforce increased their minimum wage either through legislation or through automatic inflation adjustments. This is clear evidence that (among other things) labor standards can be protected by implementation of policy levers by government. There was no negative wage trend at the 10th percentile, and proof that it is not just an isolated finding is found in its comparison with the wage measurement of that decile in the 18 states versus the other states where policy levers were not used to raise wages. In the other states without the wage increase but within the same decile, wages stagnated, providing clear proof that government intervention helped.

The biggest news in this statistical exercise is that policy can actually and positively affect the labor market, but this is no surprise to old Keynesians like me. We Keynesians have known that for nearly a century.  Of course government with its policy levers can make a huge difference in the labor market. Witness the Wagner Act of the 30s on the positive side of the ledger and such negative legislation as so-called (and grossly misnamed a la “No Child Left Behind”) regressive legislation known as “right to work” laws which effectively prevent working people from utilizing the only capital they have, their labor, while leaving corporate capital the entire globe to use (and misuse) its efforts to garner profits irrespective of consequence.

Thus but for the tight labor market in the late 1990s we would have had a negative median wage growth for the middle class over the past 35 or more years, and when one considers such a dismal wage growth at the same time GDP grew 149 percent along with net productivity (marginal productivity of workers) of 64 percent over this period, it is clear that, as I often complain, employers have not put any of these gains from this increased productivity into workers’ paychecks (instead, as I often lament, “they hog all such productivity gains for themselves”).

Gould puts it differently:  She writes: “This divergence between pay and productivity is the root of stagnant wage growth, slow family income growth, and rising wage and income inequality.”

She is absolutely right. Instead of sharing worker productivity with its workers as it did during WW II and up until circa 1974 when the middle class and the economy were booming, the corporate and  investment class has stuffed all such gains since then into dividends, capital gains, buybacks, executive compensation and the like into its own pockets and poor-mouthed labor. Result? The Dow is at historic highs and working people are in economic malaise.

How to reverse this continuing travesty and restore equity to our economy? Adopt Keynesian policies which provide levers to require such sharing. Our economy provides enormous wealth to be shared but no policy levers of late leading to a fair and equitable sharing of its fruits.

Let’s change that. Let’s go back to what works for all the people, not just the few.   GERALD    E

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2 Comments
  1. billy1926 permalink

    I agree with your ascription of better educated workers’ wage reduction — “(I chalk the latter up to wholesale use of adjunct faculty in educational institutions and/or employer bullying, or both.)” — but would like to add another reason. Since the 1970s/80s, more and more females have entered – and succeeded – in several fields of education, e.g., philosophy, psychology, astronomy, biogenetics, neurosciences, etc., that have been dominated by males for many years. But the facts still exist that they generally are paid approximately 23% lower than males in the same categories/assignments. This discrepancy isn’t discussed very much in the ivied halls of our universities, but it is a factor.

    • You are right and that is an important factor. I could pretend that such an insight is covered in my employer bullying language but not so. The lesser wage scale paid women is certainly a factor and an important one in our continuing pounding of women because they are, uh, women. My company is gone and I am back to writing stuff. I just published another on only minutes ago. It has to do with boating in economic terms. Hot here – 80s! Whew! GES

      Gerald E. Read my blog at: elderblogger.wordpress.com

      On Mon, Mar 9, 2015 at 11:56 AM, elderblogger wrote:

      >

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