[OPE-L] Real Wages Fail to Match a Rise in Productivity

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Wed Aug 30 2006 - 12:31:26 EDT

Real Wages Fail to Match a Rise in Productivity


The New York Times August 28, 2006
With the economy beginning to slow, the current
expansion has a chance to become the first sustained
period of economic growth since World War II that fails
to offer a prolonged increase in real wages for most

That situation is adding to fears among Republicans
that the economy will hurt vulnerable incumbents in
this year's midterm elections even though overall
growth has been healthy for much of the last five

The median hourly wage for American workers has
declined 2 percent since 2003, after factoring in
inflation. The drop has been especially notable,
economists say, because productivity -- the amount that
an average worker produces in an hour and the basic
wellspring of a nation's living standards -- has risen
steadily over the same period.

As a result, wages and salaries now make up the lowest
share of the nation's gross domestic product since the
government began recording the data in 1947, while
corporate profits have climbed to their highest share
since the 1960's. UBS, the investment bank, recently
described the current period as "the golden era of

Until the last year, stagnating wages were somewhat
offset by the rising value of benefits, especially
health insurance, which caused overall compensation for
most Americans to continue increasing. Since last
summer, however, the value of workers' benefits has
also failed to keep pace with inflation, according to
government data.

At the very top of the income spectrum, many workers
have continued to receive raises that outpace
inflation, and the gains have been large enough to keep
average income and consumer spending rising.

In a speech on Friday, Ben S. Bernanke, the Federal
Reserve chairman, did not specifically discuss wages,
but he warned that the unequal distribution of the
economy's spoils could derail the trade liberalization
of recent decades. Because recent economic changes
"threaten the livelihoods of some workers and the
profits of some firms," Mr. Bernanke said, policy
makers must try "to ensure that the benefits of global
economic integration are sufficiently widely shared."

Political analysts are divided over how much the wage
trends will help Democrats this fall in their effort to
take control of the House and, in a bigger stretch, the
Senate. Some see parallels to watershed political years
like 1980, 1992 and 1994, when wage growth fell behind
inflation, party alignments shifted and dozens of
incumbents were thrown out of office.

"It's a dangerous time for any party to have control of
the federal government -- the presidency, the Senate and
the House," said Charles Cook, who publishes a
nonpartisan political newsletter. "It all feeds into
'it's a time for a change' sentiment. It's a highly
combustible mixture."

But others say that war in Iraq and terrorism, not the
economy, will dominate the campaign and that Democrats
have yet to offer an economic vision that appeals to

"National economic policies are more clearly in focus
in presidential campaigns," said Richard T. Curtin,
director of the University of Michigan's consumer
surveys. "When you're electing your local House
members, you don't debate that on those issues as

Moreover, polls show that Americans are less
dissatisfied with the economy than they were in the
early 1980's or early 90's. Rising house and stock
values have lifted the net worth of many families over
the last few years, and interest rates remain fairly

But polls show that Americans disapprove of President
Bush's handling of the economy by wide margins and that
anxiety about the future is growing. Earlier this
month, the University of Michigan reported that
consumer confidence had fallen sharply in recent
months, with people's expectations for the future now
as downbeat as they were in 1992 and 1993, when the job
market had not yet recovered from a recession.

"Some people who aren't partisans say, 'Yes, the
economy's pretty good, so why are people so agitated
and anxious?' " said Frank Luntz, a Republican campaign
consultant. "The answer is they don't feel it in their
weekly paychecks."

But Mr. Luntz predicted that the economic mood would
not do significant damage to Republicans this fall
because voters blamed corporate America, not the
government, for their problems.

Economists offer various reasons for the stagnation of
wages. Although the economy continues to add jobs,
global trade, immigration, layoffs and technology -- as
well as the insecurity caused by them -- appear to have
eroded workers' bargaining power.

Trade unions are much weaker than they once were, while
the buying power of the minimum wage is at a 50-year
low. And health care is far more expensive than it was
a decade ago, causing companies to spend more on
benefits at the expense of wages.

Together, these forces have caused a growing share of
the economy to go to companies instead of workers'
paychecks. In the first quarter of 2006, wages and
salaries represented 45 percent of gross domestic
product, down from almost 50 percent in the first
quarter of 2001 and a record 53.6 percent in the first
quarter of 1970, according to the Commerce Department.
Each percentage point now equals about $132 billion.

Total employee compensation -- wages plus benefits -- has
fared a little better. Its share was briefly lower than
its current level of 56.1 percent in the mid-1990's and
otherwise has not been so low since 1966.

Over the last year, the value of employee benefits has
risen only 3.4 percent, while inflation has exceeded 4
percent, according to the Labor Department.

In Europe and Japan, the profit share of economic
output is also at or near record levels, noted Larry
Hatheway, chief economist for UBS Investment Bank, who
said that this highlighted the pressures of
globalization on wages. Many Americans, be they apparel
workers or software programmers, are facing more
comptition from China and India.

In another recent report on the boom in profits,
economists at Goldman Sachs wrote, "The most important
contributor to higher profit margins over the past five
years has been a decline in labor's share of national
income." Low interest rates and the moderate cost of
capital goods, like computers, have also played a role,
though economists note that an economic slowdown could
hurt profits in coming months.

For most of the last century, wages and productivity --
the key measure of the economy's efficiency -- have
risen together, increasing rapidly through the 1950's
and 60's and far more slowly in the 1970's and 80's.

But in recent years, the productivity gains have
continued while the pay increases have not kept up.
Worker productivity rose 16.6 percent from 2000 to
2005, while total compensation for the median worker
rose 7.2 percent, according to Labor Department
statistics analyzed by the Economic Policy Institute, a
liberal research group. Benefits accounted for most of
the increase.

"If I had to sum it up," said Jared Bernstein, a senior
economist at the institute, "it comes down to
bargaining power and the lack of ability of many in the
work force to claim their fair share of growth."

Nominal wages have accelerated in the last year, but
the spike in oil costs has eaten up the gains. Now the
job market appears to be weakening, after a protracted
series of interest-rate increases by the Federal

Unless these trends reverse, the current expansion may
lack even an extended period of modest wage growth like
one that occurred in the mid-1980's.

The most recent recession ended in late 2001. Hourly
wages continued to rise in 2002 and peaked in early
2003, largely on the lingering strength of the 1990's

Average family income, adjusted for inflation, has
continued to advance at a good clip, a fact Mr. Bush
has cited when speaking about the economy. But these
gains are a result mainly of increases at the top of
the income spectrum that pull up the overall numbers.
Even for workers at the 90th percentile of earners --
making about $80,000 a year -- inflation has outpaced
their pay increases over the last three years,
according to the Labor Department.

"There are two economies out there," Mr. Cook, the
political analyst, said. "One has been just white hot,
going great guns. Those are the people who have
benefited from globalization, technology, greater
productivity and higher corporate earnings.

"And then there's the working stiffs,'' he added, "who
just don't feel like they're getting ahead despite the
fact that they're working very hard. And there are a
lot more people in that group than the other group."

In 2004, the top 1 percent of earners -- a group that
includes many chief executives -- received 11.2 percent
of all wage income, up from 8.7 percent a decade
earlier and less than 6 percent three decades ago,
according to Emmanuel Saez and Thomas Piketty,
economists who analyzed the tax data.

With the midterm campaign expected to heat up after
Labor Day, Democrats are saying that they will help
workers by making health care more affordable and
lifting the minimum wage. Democrats have criticized
Republicans for passing tax cuts mainly benefiting
high-income families at a time when most families are
failing to keep up.

Republicans counter that the tax cuts passed during Mr.
Bush's first term helped lifted the economy out of
recession. Unless the cuts are extended, a move many
Democrats oppose, the economy will suffer, and so will
wages, Republicans say.

But in a sign that Republicans may be growing concerned
about the public's mood, the new Treasury secretary,
Henry M. Paulson Jr., adopted a somewhat different tone
from Mr. Bush in his first major speech, delivered
early this month.

"Many aren't seeing significant increases in their
take-home pay," Mr. Paulson said. "Their increases in
wages are being eaten up by high energy prices and
rising health care costs, among others."

At the same time, he said that the Bush administration
was not responsible for the situation, pointing out
that inequality had been increasing for many years. "It
is neither fair nor useful," Mr. Paulson said, "to
blame any political party."

This archive was generated by hypermail 2.1.5 : Thu Aug 31 2006 - 00:00:03 EDT