MEMORANDUM TO PRESIDENT OBAMA, SECRETARY CLINTON AND OTHER 2016 PRESIDENTIAL ASPIRANTS
SUBJECT: Seize the Future by Linking Wages to Productivity Growth
RECOMMENDATION: The Democrats should adopt a new national economic doctrine that American enterprises link wages to productivity growth, just as their competitors do in Australia and across northern Europe.
DISCUSSION: As exemplified by their lawmakers’ positions on issues like raising the minimum wage, advocating for higher wages has become the third-rail in Republican Party politics. That has placed the burden on the Democratic Party for devising policies to address wage stagnation, the leapfrogging of American wages by other rich democracies and the resulting international wage gap.
Since 1979, American wages adjusted for inflation have stagnated. A relative handful of elite earners have done well, especially in finance and the professions. And some skilled workers (about 5 percent of the labor force) in booming sectors such as IT have also beat inflation over this span. But most Americans have been fortunate if earnings even kept pace with the cost of living. The evidence comes from Bureau of Labor Statistics data documenting that median weekly earnings of full-time workers (all private industries and occupations) rose from $232 in 1979 (1st quarter) to $ 802 in 2015 (1st quarter). That is a huge increase, but after adjusting for inflation, the actual increase was a tiny 2 % or $16 per week.[i]
Wage stagnation is the culprit responsible for income disparities widening by 23 percent over this span. It is the culprit responsible for the middle class shrinking by 17 percent in recent years, one-in-six falling out.[ii] It is why some 42 percent of U.S. workers now earn below $15 per hour.[iii] And it is the culprit responsible for only 21 percent of Americans in 2014 believing that their children will live better, a record low in polling. It stood at 54 percent just before the election of President Reagan launched the era of inequality. [iv] Until then, families had fared well as the postwar boom created history’s greatest middle class; men and women could control their own economic futures in an opportunity society where striving produced a secure and rewarding life.
Wages in Peer Nations Have Leapfrogged U.S. Wages
The outcome for workers in other rich democracies has been dramatically better. Real earnings have risen steadily enough for decades that manufacturing wages in thirteen other rich democracies have overtaken to now surpass U.S. wages. [v] Wages in Germany, for instance, which were 3 percent lower in 2001, were 28 percent higher by 2012. [vi] And this wage gap grows wider each year. In Australia and northern Europe, real wages have grown to be more than $10 an hour higher than in the U.S. And these figures are encompassing, including direct pay, social insurance fees and labor-related taxes. The U.S. has become a low-wage nation. As befitting higher wage nations, the quality of life abroad for most families is better, with secure retirements, longer vacations and necessities such as quality, affordable public education, college and health care more broadly available. That is because the gains from growth are broadcast widely across society, causing income disparities to be far smaller than in the U.S. For example, the income of the top decile of Australians rose 60% from 1990-2010, while income of lower-paid workers rose 40%.[vii]
The Secret to Steadily Rising Wages in Peer Nations: Wages Linked to Productivity
Wages in Australia and northern Europe are linked to productivity growth. Various techniques are utilized to achieve this proven, decades-old connection, usually involving government agencies or labor unions. The consequence is that about one-half of the increase in productivity each year goes to wages. It works like this:
For most employees in these nations, wages increase by the sum of cost-of-living last year plus about one-half of the growth in productivity last year. If inflation was 2.5 percent last year and productivity grew 2 percent, for example, wages the following year will tend to rise an average of 3.5 percent, i. e. 2.5 + (.5 x 2).
This Australian wage system means about one-half of the gains from economic growth each year go to workers or labor, with the other half supporting investment, job training, R&D, profits and the like. In America by contrast, virtually none of such gains from growth flow to labor. Because wage increases abroad are linked to productivity, inflation is not a danger and, as Australia and Germany exemplify, neither R&D nor investment is harmed. Indeed, because wages are linked to productivity, international competitiveness is not impaired. In fact, it may be improved. Linking wages to productivity incentivizes workforce upskilling. Consequently, Australia and every nation in northern Europe now have more skilled labor forces than the United States. As recently as 1998, it wasn’t that way, but skill levels in nations like Austria, Denmark and France have since risen above U.S. levels.[viii]
Where would U.S. wages be now had this system also been utilized in the U.S. since 1979?
Between 1979 and 2014, labor productivity increased 66 % in the nonfarm business sector, the largest combined U.S. economic sector, according to BLS.[ix] If one-half of the 66 % gain in productivity since 1979 had gone to wages as it does in peer nations, then the increase in real wages would have been 33 % instead of 2 % over that span. And the median weekly earnings of full-time workers in 2015 would have been $ 1,045 ($786 x 1.33) or $243 per week more than at present for the median wage earner.
Looking ahead, American wages will continue stagnating except for brief periods of economic boom. Is the Democratic Party satisfied with such trickle-down, or is it willing to rewrite history with seasoned structural reforms from abroad that have proven capable of yielding broadly based prosperity.
[i] BLS – http://www.bls.gov/webapps/legacy/cpswktab1.htm . At that BLS website site, retrieve current and constant median wage data for all over 16 years of age. Then on new page, request statistics for the period 1979 – 2015.
[ii] Richard Reeves, “Classless America, Still?” Brookings Institution, Aug. 27, 2014.
[iii] Harold Meyerson, “What Clinton Must Do,” Washington Post, April 16, 2015.
[iv] Dana Milbank, “American Optimism is Dying,” Washington Post, Aug. 12, 2014.
[v] BLS, Manufacturing data tables, 1996-2012 (XLS), table 1.2., http://www.bls.gov/fls/#compensation.
[vi] BLS, Manufacturing 1996-2012 (XLS), table 1.1., http://www.bls.gov/fls/#compensation.
[vii] Clancy Yeates, “Advance Australia Fair? Maybe Not,” Sydney Morning Herald, Jan. 27, 2014.
[viii] Education at a Glance, OECD, 2008, Table A1.6, http://www.oecd.org/education/skills-beyond-school/41284038.pdf .
[ix] BLS – http://www.bls.gov/lpc/prodybar.htm .