This article first appeared on The Globalist.
For all the current public disdain on Europe, Americans would do well to look at its economic model.
The menu of proposals offered by U.S. presidential candidate and former Secretary of State Hillary Clinton in her July 13, 2015 speech adds to a host of proposals to address wage stagnation and the ensuing economic malaise of middle- and working-class Americans.
Good ideas all, but they share a common framework provided by Reaganomics in which returns to labor are ultimately dictated by market forces. Skilled labor enjoying scarcity rents commands robust wages, but the other 95% of employees in the United States receive wage offers dictated by demand and supply.
Government wage subsidies, educational enhancements, daycare and the other economic menu offerings shuffle income from taxpayers and employers to the middle class. Yet, aside from embellishing labor unions, the salad bar contains no market disruptors, the essential ingredient to restoring middle class prosperity.
Eschewing market disruptors
The reforms are offered within the conceptual framework provided by Reaganomics that eschews market disruptors. Recall that Milton Friedman demonized in the pages of the Wall Street Journal the common behavior by CEOs during the 1950s and 1960s to share corporate prosperity with employees.
Those were the days when the leading American firm was General Motors, paying an average $35 per hour (in today’s dollars) — and when the autoworkers’ union agreements became the template for economy-wide wage increases.
Through a combination of union prowess and a benign or even communitarian ethos in executive suites, wage gains were de facto tied to national productivity gains.
Labor markets were disrupted for certain — but in a fashion that neither threatened inflation nor penalized investment, R&D or profits. The grandest middle class in history was created in a nation that exalted Horatio Alger.
Once ahead, now falling behind
Australians and lawmakers in northern Europe took the American lesson to heart, evolving institutions and a political consensus to systematically link wages to productivity.
And while this model was abandoned in the United States after 1980, it remained so robust in other rich democracies that real wages in 13 peer nations now exceed U.S. wages.
Indeed, wages in the pivotal manufacturing sector in nations like Germany, Switzerland and Norway exceed U.S. manufacturing wages by at least $10 per hour, according to the U.S. Bureau of Labor Statistics.
Between wage stagnation and lower-wage service jobs replacing valuable manufacturing jobs offshored, the United States has become a low-wage nation, its income disparity the worst among peers. Non-union Walmart paying workers $10 an hour is the trademark American employer.
American middle-class prosperity is being held hostage by Reaganomics. Only when reforms offered by Democrats move beyond that conceptual framework by linking wages to productivity can its prospects brighten.
Each spring, the U.S. Department of Labor should announce a goal for all wage adjustments across the entire economy. Its figure should combine the previous year’s cost of living and perhaps one-half of the productivity growth, a template for agreements being struck between employer and employee in every corner of the nation.
Hillary Clinton should reject the Reagan paradigm and become a transformational figure by urging a return to the model that created the great American middle class.