Have the rich caused middle class wage stagnation?

by on January 8, 2011 at 7:08 am in Economics, History | Permalink

I don't always agree with Kevin Drum, but usually I find that he has good arguments.  In this passage, however, I think he is overreaching:

Still, I don't think that a plausible story of causation [the gains of the wealthy to the stagnation of other incomes] is really all that hard. First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.

First, money matters in the short-run most of all.  Tight money (unless maybe it is radical deflation, but even then the U.S. resumed growth out of the GD fairly quickly and furthermore the median worker was not unemployed) is not a plausible cause of median income stagnation over decades.  The link between trade and wage stagnation does not find support in the data.  Deregulation hurt the wages of air traffic controllers, but how many other groups?  Enough to shift the median?  Stagnation in the real minimum wage shouldn't much hurt median wage growth over a forty year period.  Unions fell mostly because of the shift to services, and furthermore the "union wage premium" in the data is a one-time ten to fifteen percent gap, not an ongoing change in rates over decades, and it is reaped by some not all workers. 

In my view the gains of the top one percent and the stagnation at the median are largely separate phenomena; note that the top gains so dramatically only in the Anglosphere, whereas growth stagnation affects most of the OECD after the early 1970s.

How then might rent-seeking in the top income brackets damage ordinary Americans, as I have myself suggested?  The most plausible mechanism is this: gains of the wealthy through capital markets come at the expense of other individuals in capital markets.  Some kinds of capital — for instance finance capital – had been profiting more and implicitly taxing other kinds of capital, often through "trading," broadly not narrowly construed.  The taxed capital "retreats" and this has adverse affects on labor, much as an increase in the corporate income tax falls partially on labor and partially on consumers (which also shows up as lower real wages).

The labor which is "subsidized" by this change in capital returns is smaller in number and more concentrated, sectorally, than the labor which is taxed.

I wouldn't say there is massively firm evidence for this hypothesis, but rather it is the major contender by process of elimination.  If you are wondering, many of the years of wage stagnation have shown relatively low shares of investment in gdp; see the new McKinsey report "Farewell to cheap capital?".

So there we have one factor connecting the gains at the top to losses at the median but still I do not think it is the major factor behind median stagnation.  I will be writing more on this.

Slocum January 8, 2011 at 4:00 am

Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.

Wow, there's an awful lot of the progressive world view packed into those few sentences. The problem, from his perspective, is the regrettable low inflation, lack of trade barriers, and lack of regulations protecting favored industries?!?

Would Drum really favor re-regulating the airline industry and returning to the days when unionized airline employees made high wages but middle-class Americans could rarely afford to fly? (My father was a white-collar worker. I went on exactly one commercial airline trip before I was an adult — paid for by a rich relative). Would he bring back a regulated telephone industry? Does he remember? You weren't allowed to own your own handset — it had to be leased. You weren't allowed extra phone jacks in your house without a monthly fee (and without paying a unionized technician to install them). As a college student in the late 70s and early 80s, I remember waiting until 11PM to call my girlfriend for a few minutes of long-distance (which wasn't cheap even at that hour). Does Drum remember what Detroit/UAW built cars were like in the 1970s? Heavy, inefficient, unreliable, unsafe, rust-prone junk compared to 2010. And so on.

So what caused the stagnation of middle-class living standards? Nothing — they've improved dramatically since the 1970s when you account for new goods and services and the decline in cost and improvements of existing ones.

Norman Pfyster January 8, 2011 at 5:13 am

I was amused by the notion that low inflation is hurting labor. As if the cure for wage stagnation was a bought of hyperinflation.

M January 8, 2011 at 5:37 am

I was amused by the notion that low inflation is hurting labor. As if the cure for wage stagnation was a bought of hyperinflation.

I believe he was operating under the "say economic vernacular that happened, then blame it" principle.

Jean January 8, 2011 at 6:37 am

Well this one is simple. As the costs of benefits increase at twice the rate of inflation employers have to spend productivity gains on health insurance rather than on increasing wages. Good thing science is no longer politicized and the feds are financing stem cell research! Hopefully we'll soon be able to grow brains for the left.

Andrew January 8, 2011 at 6:50 am

He said it wasn't hard to tell the story. I agree with him.

Philo January 8, 2011 at 7:04 am

@ Joan:

". . . it is difficult to impossible believe that they increased their productivity that much while other 99% people did not." What's so difficult (let alone "impossible")? The top entertainers are paid much more now than formerly, because they reach much larger audiences. The top financiers gather funds from a much larger pool, and do much larger deals. Productivity increases with the scale of the activity, which–for the top performers–has been greatly augmented by modern means of communication.

joan January 8, 2011 at 8:34 am

Slocum
The increase in the wealth produced by Microsoft, Apple, Google, Amazon, Ebay, Facebook, Dell, Netflix etc is not reported to the IRS as income which is the source of the data on incomes nor is this a discussion about "well being". The discussions is about why incomes at the top have increased while wages have not.

Ann January 8, 2011 at 8:41 am

Is it possible that taxes and regulations encourage stock and financial market 'productivity' over that of actual goods? Gains in the first tend to benefit the top end of the income distribution. Losses in the second tend to push more people out of the middle and lower on the scale.

mark January 8, 2011 at 11:25 am

I think it is critical to see that loose money is necessarily at the heart of the accumulation of finance capital. As well, technological advances dramatically increased the velocity of capital. Since most of finance works on a commission basis – i.e., comp scales as a function of the financing or the assets managed – it is inevitable that comp in finance would grow as dramatically as MV. In addition, you have the dramatic rise in retirement savings which is a unique and unprecedented development in human history. Much of what Wall St invests is retirement savings.

I suggest also that the sharp rise in global workforce participation, due to technology and modernization abroad and also dramatic cuts in discrimination at home, has a major role in keeping nonfinancial wages down. Finally, the period of suppressed wages coincides with the era of landuse and environmental regulation which could be a coincidence but I tend to think not, rather, it helps limit demand for workers in extractive and processing industries.

joan January 8, 2011 at 12:05 pm

Philo
I am aware of these explanations but performers are only a tiny fraction and the people who work in finance less than 20% of the group that doubled their share income. Even if you believe that the financial sector has added that much extra to the GDP of the country, it does explain why executives in non financial corporations, 40% of the of the top .1%, are now getting 10% of the profits instead of 5% like they use to or the increase in the income of lawyers. Could it be that Laffer was right and the high tax rates discouraged this group from seeking higher incomes that were always available to people holding these positions but only when the tax rates were reduced did it seem worth the effort.

derek January 8, 2011 at 12:23 pm

Maybe it is more simple. Isn’t the trend the exact opposite of government spending as percent of gdp? One could probably trend the overhead and profit over time on a company that is on the way to insolvency and come up with a similar chart.

Derek

Jon C. January 8, 2011 at 4:47 pm

In "Fault Lines" Raghuram Rajan draws a parallel between wage stagnation and education stagnation. I don't have the book on me right now to post the relevant data, but it was something like "since the 80's the amount of education the average American has gotten has stagnated while the need for high skilled labor has grossly increased. Along with this, we've also seen an enormous and continues drop-out rate of high school students (over 1 mil a year) and many drop out of college as well.

Of course he draws other factors into this, but the education one is interesting when you look at the numbers.

lemmy caution January 10, 2011 at 9:28 am

Spensers' story about the growth of labor supply makes sense.

There are not many well paying US manufacturing jobs in this list "Microsoft, Apple, Google, Amazon, Ebay, Facebook, Dell, Netflix, etc."

econobiker January 11, 2011 at 9:43 am

It really is about "retail strip mining" the US consumer. You can send well paying jobs to China, etc for near slave wages and still charge 1st world prices on goods only so long before the balance shifts. Sure the US consumer is benefiting from the "cheaper goods" but the business is profiting at a far greater rate yet not re-investing in the economy the same way as in history.

Think Walmart: it used to buy goods made in factories in the USA so the workers would be paid US wages and then buy at Walmart. Now it buys in China, still charges a large multiplier on the goods, and then concentrates the profits in the corporation/owners. No reinvestment in local area economies as there are no local mills, factories, plants anymore…

John Dewey January 12, 2011 at 12:43 pm

econobiker: "Think Walmart: it used to buy goods made in factories in the USA so the workers would be paid US wages and then buy at Walmart."

Purchases by such factory workers have always been a very tiny portion of Walmart revenues.

econobiker: "No reinvestment in local area economies as there are no local mills, factories, plants anymore…"

Because Walmart has driven down the prices of so many consumer goods, its customers have far more dollars to spend on vacations, on housing, on automobiles, and many other goods and services supplied by American firms. Parts of the economy other than labor-intensive manufacturing have benefitted enormously.

FYI, U.S. manufacturing output was higher in the past decade than ever before. Instead of assembling steam irons and nerf guns, our factories are producing automobiles, aircraft, gasoline, medical equipment, pharmaceuticals, and much, much more.

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