Inequality and Wages

From the title of this blog, income inequality will clearly be a major topic.  In my last post before a quickie, I highlighted the growing gap between productivity and compensation.

Nobody tries to deny the existence of growing income inequality anymore.  Instead, some have tried to shrug away the consequences, arguing that income inequality is okay because there is income mobility, or that income inequality is the price of liberty.  Somehow, these arguments are losing their resonance, as it has been pointed out that the facts show that income mobility becomes more difficult as inequality increases.  And there has been no positive correlation between increasing income inequality and increasing liberty (quite the opposite).

Cries of class warfare have become less effective, as the claim has been turned around--yes, there has been class warfare, and the one percent (or 0.1 percent) have been winning.

The question then arises as to what has caused increasing income inequality, and, therefore, what can be done about it.  If you conclude that the main cause is technological change, or increasing international trade and foreign competition, then you are off the hook because those trends are not going to reverse and increasing income inequality is just going to have to be something we have to live with.

President Obama, in his excellent speech given in Osawatomie, Kansas, last December, talked about income inequality.  The new Chair of his Council of Economic Advisers, Alan Krueger, gave another speech in January, complete with slides, that focused specifically on income inequality and its adverse consequences on the U.S. economy.  That speech noted what we have talked about in this blog in several postings, that during the Clinton Administration, income tended to rise across all income groups, whereas during Republican administrations, the increase in income tended to be concentrated at the very top.  This is not a coincidence.  Republican policy, in deeds if not in words, regards income inequality as a feature, not a bug.

Obama and Krueger have made policy recommendations to address income inequality, which a Talking Points Memo posting succinctly summarized as: "Obama wants to raise taxes on high earners to Clinton-era levels, uphold the estate tax, implement health care reform to bolster low-income uninsured people, and implement Wall Street reform so as to limit excessive risk-taking in the financial sector."   


TPM is, of course, basically on Obama's side, but its posting questions whether, even if all if these policy recommendations were fully implemented, income inequality would be significantly reduced.  These policies do not really address the root  of the problem.  For example, the typical working person might feel better if his rich boss were taxed more fairly, but then that working person is still bringing home the same lousy paycheck.

May we humbly suggest a couple more policy recommendations?  Strengthen labor unions and raise the minimum wage.

Business, of course, has always been at war with unions--sometimes shooting wars.  The period of the unions' greatest strength in the United States, from World War II through the '50s and '60s, corresponded to the period of the greatest improvement in the living standards of the middle class.  Again, this is not just a coincidence.  But beginning in the '70s, unions began to lose the war, and at the same time the middle class dream began to slip away for millions of Americans.

Republicans, of course, have always opposed raising the minimum wage, and always supported weakening the unions.  Whenever it is proposed that the minimum wage be raised, they ALWAYS claim that it will result in mass layoffs.  The fact that the minimum wage has been raised many times in the past without this result never fazes them, they always raise this claim.

Giving workers wage increases in line with increases in productivity, which, as we have noted, have diverged dramatically in recent years, especially during Republican administrations, would do far more to reduce income inequality than any tax plan.

Freedom and Liberty

In the middle of working on another posting, but I thought I'd post this short piece.

Republicans often invoke their love of freedom and liberty, with the implication that Democrats would impair those wonderful American characteristics.  In practice, they tend to be slippery concepts.

Jim owns his own house--or rather, he has a mortgage on it.  He lives in a small town in which the economy has been flat for a while, so selling the house might be difficult.  One of his children has asthma, and another has a birth defect, although his children's medical costs are helped by SCHIP (State Children's Health Insurance Program).  He has worked all his adult life in the coal mine near his town.  The mine is not unionized, and what raises he has received in the last ten years have not been as high as the inflation rate, so he is falling behind.  But at least the mine has a good safety record, thanks to government regulators, and the mine cleaned up its act after being fined by the EPA, so the water is cleaner where Jim likes to fish.  Both of Jim's parents are retired, but Jim does not have to support them, because they are doing okay on Social Security and Medicare.  Jim attends church service every Sunday.  Jim is free to vote, and he always votes Republican, because those Democrats are just a bunch of socialists.

Is Jim free?  Does he have liberty?

Roger owns the coal mine in which Jim works.  The government is always restricting his freedom by telling him how to run his mine.  It made him install new safety equipment and undertake certain procedures to cut down on the risk of coal dust explosions.  It told him that he was polluting some local streams, fined him and made him change his practices so that pollution would be reduced.  But due at least partly to his ability to keep wages down, Roger was able to take home $5.1 million in profits last year.  But without those damn government regulations he would have made $5.5 million.  Roger attends church service every Sunday.  Roger is free to vote, and he always votes Republican, because those Democrats will always try to take away his freedom and liberty.

Is Roger free?  Does he have liberty?

Discuss.  I expect to be lectured that I don't really know what freedom and liberty are about.

Productivity and Compensation

I promise from now on to be more regular in posting.

The Bureau of Labor Statistics (part of the U.S. Department of Labor) is a great source of raw data.  The online Monthly Labor Review takes a look at their data in more aggregate form, to highlight trends, etc.

I found the article in the January 2011 issue, "The compensation-productivity gap: a visual essay," to be particularly interesting.  True to its role of being a governmental body that tries not to be political or provocative, the BLS article merely presents the data without offering an interpretation.  But let's look at the data presented.

The article presents data on changes in labor productivity and labor compensation.  As the article notes:

"Productivity growth provides the basis for rising living standards; real hourly compensation is a measure of workers’ purchasing power. Increases in labor productivity—the most commonly used productivity measure—reflect investments in capital equipment and information technology, and the hiring of more highly skilled workers. Employers’ ability to raise wages and other compensation is tied to increases in labor productivity. Since the 1970s, growth in inflation-adjusted, or real, hourly compensation has lagged behind labor productivity growth."

The first chart shows this trend:

From the end of World War II until the mid-70s, compensation tended to track along with increases in productivity.  That is, employees shared in the benefits that businesses realized from increased productivity.  The gap began in the 1970s, and has widened ever since.

Chart 2 of the article breaks out these trends by selected periods:

This chart shows that average productivity growth was fairly high between 1947 and 1973, and compensation more or less kept up with productivity.  Productivity growth was much lower in the period 1973 to 1979, and compensation growth was also considerably lower than in the prior period.  Productivity growth, however, started coming back, increasing in every decade, until by the last decade productivity grew at nearly the same rate as it had grown in the period 1947-1973.

But in the period 1979-1990 compensation growth plummeted at the same time that productivity growth started its comeback.  The period 1990 to 2000 saw compensation increase much more strongly, although not at the same rate that productivity growth increased.  The period 2000 to 2009 saw productivity growth increase at the same time that compensation growth reversed course, and employees once again saw fewer benefits from their increased productivity.

While the periods are imprecise overlaps, the period 1979 to 1990 was predominantly during the Reagan/Bush Republican Administrations, while the period 1990 to 2000 was predominantly during the Clinton Democratic Administration. The period 2000 to 2009 was predominantly during the Bush Republican Administration.  Is it a coincidence that compensation growth was substantially lower during Republican Administrations?

I don't think so.  Policies matter, and while administrations cannot turn around an economy on a dime, they can affect economic trends.  Republican administrations are unabashedly administrations of "Business," and they can and do promote policies that benefit business, even if it is at the expense of business's employees, who also happen to be business's customers.

In short, do not be fooled into buying the claim that whatever is good for business is good for America.  The interests may or may not coincide.  Policies that promote strong labor laws and enforcement, on the other hand, do not penalize one particular business over another if they all need to follow the same rules.  At the same time, policies that promote increased labor compensation (or at least do not suppress it) will benefit business's customers, and benefit business as well.  A win/win.