Cross-posted at Reports from the Economic Front.
The Wall Street Journal recently surveyed more than 50 economists, asking them what they thought was the main reason U.S. firms were not hiring more workers. Approximately 65% answered that it was a lack of demand for goods and services, 27% thought it was uncertainty about government policy, and 8% said it was the existence of more “favorable” hiring conditions overseas.
One might think that with so many economists citing a lack of demand as the primary reason for our continuing high rate of unemployment, those same economists would argue that getting more money into the pockets of working people would be a good strategy for recovery. But did the survey also reveal strong support by economists for a higher minimum wage, new union-friendly labor laws, a single payer health plan, an increase in social security payments, an aggressive industrial policy? No.
In fact, according to the Wall Street Journal, “Despite their forecasts for slow growth and an elevated unemployment rate, the economists aren’t in favor of futher action either by the Fed or the Federal government.” In other words there was no support for policies (micro or macro) that would dramatically change the economic environment.
There is good reason for rejecting this preference for the status quo. Take a look at the chart below which comes from an article in Investor’s Business Daily. Each point on the chart shows the change in total wages (adjusted for inflation) over the previous ten years.
As the article notes:
The past decade of wage growth has been one for the record books — but not one to celebrate.
The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economy-wide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation).
Two years into the recovery, and 10 years after the nation fell into a post-dot-com bubble recession, this legacy of near-stagnant wages has helped ground the economy despite unprecedented fiscal and monetary stimulus — and even an impressive bull market.
Over the past decade, real private-sector wage growth has scraped bottom at 4%, just below the 5% increase from 1929 to 1939, government data show.
To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25% with one exception: the period ended in 1982-83, when the jobless rate spiked above 10% and wage gains briefly decelerated to 16%.
In other words, we are experiencing a steady and long term decline in total real wages, one that was worsened but not caused by the Great Recession. Thus, there is little reason to believe that maintaining existing policies will lead to any meaningful increase in wages and, by extension, overall demand and employment.
How did the economy grow over the last decade despite this decline in wages? As we known, the answer was a debt-driven housing bubble. How is the economy growing now that the housing bubble has popped? Here is the answer given by Investor’s Business Daily:
So how has the economy managed to scale new GDP heights despite sagging real wages?
Real disposable income is up 3.6% since December 2007, thanks to nearly $1 trillion in government support via higher social benefits (up $583 billion since the recession began); lower tax bills (down $255 billion); and higher government wages and benefits (up about $125 billion).
Absent those sources of support, real disposable income would still be 5% below its prior peak.
What the article doesn’t mention is that in contrast to the decline in total real wages, corporate profits and stock prices have been soaring. In fact, the trends are related: the decline in wages is one of the main reasons for the growth in profits and stock prices. Economists at the Center for Labor Market Studies discuss these trends and their relationship in a recent study, which includes the following table:
With these trends in mind the professional consensus for the status quo becomes easier to understand. So does the need to actively oppose it.
Comments 13
MK — July 26, 2011
I love Sociological Images, but sometimes the onesidedness of posts shocks me. For example, why do the editors of SI allow glaring and unjust inequalities in who gets to voice opinions about economic matters? Twice in the last week a Marxist economist's opinions have been given center stage to SI's large readership. With no other voices heard about these important issues, it is not unlikely that many will be persuaded without having considered other possible theories. This hegemony of ideas on SI is not fitting and in the name of fairness posts like this should be counterbalanced by posts having other theoretical bases.
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Skalchemist — July 26, 2011
While I have no doubt that the rich are getting richer while the rest of us tread water, the chart above seems to me to be comparing apples to oranges.
It is comparing increases in non-personal things to personal things. The fact that a particular corporation's profits has gone up is interesting, but not, in my opinion, comparable to the increase or lack thereof in a average wages of people. It would be better to compare, say, the increase in the average wages of Fortune 500 executives during the same period. I have no doubt the chart would look somewhat similar, but it would be a cleaner comparison.
Leslee Beldotti — July 26, 2011
Ok, I'll confess that I don't understand this article!
The economists surveyed by the Wall Street Journal aren't in favor of further action either by the Fed or the Federal government because they somehow benefit from the decline in real wages?
Huh?
(I'm not trying to be sarcastic or facetious. I really don't understand.)
AlgebraAB — July 26, 2011
"But did the survey also reveal strong
support by economists for a higher minimum wage, new union-friendly
labor laws, a single payer health plan, an increase in social security
payments, an aggressive industrial policy? No."
These policies might put more money in the pockets of individuals who are *already working* but they would not necessarily alleviate the unemployment situation. In fact, many economists would suggest that a higher minimum wage and an expansion of unions would likely exacerbate unemployment. I know that the small firm I work for (which is not generating a profit currently) would likely have to replace some full-time personnel with part-time personnel were the minimum wage to go up significantly. I'd imagine there are a lot of businesses in the same boat.
The only policy suggestion of yours that I could see really alleviating unemployment would be "an aggressive industrial policy." My question, however, is what does an "aggressive industrial policy" mean to you? You throw it out there but don't elaborate at all. The reason I ask is, of course, because the countries that have been the most successful with industrial growth over the past decade or so have all been countries with low labor costs (low wages), which you're clearly against.
I'm actually curious what an American "Marxist" economist has to say about the disjunction between labor costs in the US/Europe/Japan and labor costs in East Asia and Latin America. This is a major topic of discussion in diplomatic meetings as of the past 2 years. I put "Marxist" in quotes because most Third World Marxists that I know would argue that the U.S. economy is such a basket-case in part due to the fact that labor costs are so high relative to the country's physical output. That, if it weren't for the dollar's status as reserve currency (which shields it from a great deal of inflation - witness QE1 and QE2, which would've ruined any other country; instead, our creditors are forced to buy more dollars to protect their existing holdings) and for the hegemony of Wall Street internationally, then American wages would be even lower. That's the anti-imperialist argument. It's also a far more powerful explanation for the incongruity between corporate earnings and wages. You're assuming all U.S. corporate profits are generated domestically, which would support the idea that government benefits are bolstering them. That isn't the case though. Especially when we're talking about finance - much (if not most) of the profit generation is happening through foreign investment.
AlgebraAB — July 26, 2011
One other point (which I've made before, but bears repeating) ... comparing the current "Great Recession" to the Great Depression is comparing apples to oranges.
Going into the Great Depression, the U.S. was a net EXPORTER and a net CREDITOR.
Today, the U.S. is a net IMPORTER and a net DEBTOR.
Coming out of the Great Depression, the U.S. was one of the few remaining industrial powers. Western Europe and Japan were (temporarily) ruined industrially. The Soviet bloc closed itself off to Western industry. The rest of the world was mostly pre-industrial and preoccupied by anti-colonial struggle.
That isn't the case coming out of the "Great Recession" ... We've never faced as many industrial competitors as we do today.
During the Depression-era, the majority of the populace was engaged in jobs that resulted in physical output: agriculture, industry, commerce.
Today, agriculture, industry and commerce are outflanked by FIRE (finance, insurance, real estate), education, healthcare and other "non-productive" (in the physical output sense) sectors of the economy. In short, prosperity in the primary/secondary sectors of the economy is a prerequisite for prosperity in the tertiary sector ... yet, currently in the U.S., the primary and secondary sectors are shrinking while the tertiary sector is expanding.
During the Depression era, most banks were geared towards either (1) direct investment in tangible assets or (2) savings, loans and the typical consumer-oriented business of retail banking.
Today, the biggest profits in finance come from arbitrage, investment in non-tangible assets (i.e. CDOs and other similar securities) and leveraged buy-outs.
During the Depression era, currency exchanges were fixed or based on precious metals.
Today we have QE1 and QE2.
As you wrap your head around these differences, I think it'll become clear why Keynesian stimulus was/is doomed to fail, regardless of the scale. It's an outdated model geared for an economy that is *radically* different than our own.
Bob — July 26, 2011
As an empirical point, the minimum wage has increased a couple times since 2007.
http://www.infoplease.com/ipa/A0774473.html
You may want to say this is unrelated to the concurrent rise in unemployment, but I think a significant number of economists will argue against that idea.
http://data.bls.gov/timeseries/LNS14000000
Anonymous — July 26, 2011
Corporate profits redistributed to stockholders participate in the economy exactly as much as corporate income paid to employees does. The economy angle is a red herring.
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