But before we get into the politics and the policies, it’s reasonable to ask, “why should we expect pay to grow with productivity?” Well, one reason is that as workers are more productive — as they produce more output per hour of work — they ought to reap some of the benefits. And, in fact, for most of the last 50 years, average compensation has kept pace with productivity growth. One outcome of that tight relationship has been that the share of compensation in national income has remained pretty constant, at around 65 percent.
But there are two critical and unsettling developments in this story, both central to the growth/prosperity disconnect. First, as the figure below shows, it wasn’t just average comp that grew with productivity, it was the paychecks of the “typical” worker — meaning, in this case, lower-paid blue collar and non-managerial service workers. Then, around the mid-1970s, the disconnect, or, if you prefer, the wedge of wage inequality, took over.
The second point, which you don’t see on the graph, is that in the past few years even average, as opposed to say, median, compensation has fallen behind productivity growth. That means a lot more workers started losing ground, and as a result, the compensation share of national income is down to around 61 percent. That’s a loss of about 4 percentage points, or over $600 billion in annual compensation, which amounts to about $4,000 per worker.
And to be clear, that money didn’t evaporate. It flowed up the income scale into profits, dividends, and other financial returns of the type that show up in stock portfolios, not paychecks.
I’m not distinguishing lower pay from average pay just to show off my mastery of the national accounts, although I’m sure you’re impressed. The point is to give you a sense of just how pervasive these wage problems are. Using high-quality Social Security Administration wage data, Larry Mishel shows that since 1979, the real annual earnings of the top 1 percent are up about 140 percent in real terms, while that of the bottom 90 percent — that’s 90 percent! — are up 15 percent. That’s a difference in annual growth rates of 2.6 percent per year versus 0.4 percent per year, meaning the top 1 percent’s earnings have for decades now been growing at a rate that’s more than 6 times that of the bottom 90 percent. Once you really understand that point, our electoral dystopia doesn’t seem all that mysterious.
So, what would it take to reconnect pay with productivity for workers across the pay scale?
Here again is where the politics gets interesting. Like the dog who chased the car — “whaddya gonna do with it once you catch it?”— one might ask Rep. John Boehner and Sen. Mitch McConnell what’s their reconnection agenda? Already, I’m hearing ideas like corporate tax cuts and new trade deals. And, to be fair, the president favors both of those (though his corporate cut is revenue neutral — it closes loopholes to pay for points off of the tax rate).
The two Republican leaders added a few other ideas in a Wall St. Journal oped yesterday, including building the Keystone pipeline and “a proposal to restore the traditional 40-hour definition of full-time employment” as part of the health reform law.
I don’t mean to purvey negative vibes right out of the gate, but none of these ideas will help close the gap between macroeconomic growth and microeconomic well-being.
Corporations are already facing historically low effective tax rates (i.e., what they actually pay in taxes, as opposed to the statutory rate); pipelines create hardly any lasting jobs, and gas/oil is already cheap. And yet the growth/prosperity disconnect is alive and well.
The Obamacare rule tweak is downright counterproductive, as Paul Van de Water explains here (it would potentially lead to more, not less, part-time work).
Here’s the conundrum faced by our new majority: the most reliable way to reconnect growth and incomes is to increase the bargaining power of the workers on the wrong side of the income divide. And that’s not something they can countenance. Strengthening union power, direct job creation in the interest of full employment, enforcing labor standards (like overtime pay), raising the minimum wage, fighting currency manipulators to lower the trade deficit…these are all surely a bridge too far for them.
Maybe there’s some middle ground. Speaking of bridges, perhaps the parties can agree on infrastructure investment, though that has fiscal implications — more spending — that likely means finding new revenue, also probably verboten on the R’s side.
To be clear, this is not a story of good D’s and bad R’s. It’s not like the Democrats were pushing very hard on a reconnection agenda either. In fact, that’s where we started, with the political observation that neither party is articulating a simple, strong policy agenda that could plausibly reconnect growth and middle-class wages, incomes, and opportunities.
That’s why one interpretation of Tuesday’s outcome was that it was nothing more or less than a big, dystopic groan from an electorate that knows something fundamental is broken and nobody’s trying to fix it.