According to the most recent employment report, the economy created 292,000 jobs in December, and the employment to population ratio, a key measure of the health of the labor market, increased to a post recession high of 59.5 percent. The unemployment rate was unchanged at 5 percent, but that’s because workers returned to the labor force as jobs became more plentiful--not job stagnation. The report was encouraging.
But what about wages? Will this time be different? Will wages finally start rising, and if so, will it be enough to stop, if not reverse increasing income inequality?
There has been some progress. The growth in wages over the last year has been 2.5 percent, but that is hardly enough to make up for the stagnant wage growth over the last few decades.
What will it take for workers to finally realize robust growth in their take home pay?
Create better jobs
In graduate school, I was once told that “people don’t have marginal products, jobs do.” What does this mean?
According to economic theory, the growth in wages should equal the growth in prices – the inflation rate – plus the growth in productivity. Thus, when workers become more productive and become more valuable to the firm, their wages ought to rise accordingly.
But there is a limit to how productive a worker can be in a particular job. Take a clerk at a grocery store as an example. It doesn’t matter how well educated or how potentially productive that worker might be. The job itself limits the value of the worker to the firm. It’s possible for the worker to do less than the maximum possible, but the best checker in the world can only be paid so much, and it doesn’t matter at all if the worker has potential that far exceeds what the job calls for.
A mismatch between a worker’s potential and the job he or she has is partly a matter of how jobs are allocated. Ideally, we want to match workers with jobs in a way that allows each worker to realize their potential. But if there aren’t enough jobs to allow everyone to reach their potential, if some workers must accept jobs for which they are overqualified, how can this happen?
We need to do much more to attract businesses that provide good jobs. I have mostly been opposed to cutting the corporate income tax, but I am coming around. Proposals to broaden the tax base while cutting the tax rate are worthy of attention, as are other means of making the US an attractive place for businesses to locate (or remain), especially those that attract firms with high paying jobs.
We also need to do all we can to support the formation of businesses within the US that offer high wage opportunities. Government support of alternative energy technology is one area we can focus on, and supporting small business startups – a traditional source of job creation and innovation that has fallen off lately – is another.
Build an educated workforce and they will come
We also need to do a better job of providing the educational resources people need to reach their full potential. A recent report in The Fiscal Times noted that there has been a large decline in public support for universities and a corresponding increase in tuition. Student debt is soaring, and equal access to the best educational resources is threatened. We can and must do better.
One difficult problem is predicting what jobs will be available in the future. When I was in college, I could have never imagined I would someday become a blogger, at that time computers were still in their infancy. I don’t get paid to blog, but others do, and it illustrates how hard it is to foresee what opportunities will be available years from now.
Students need a broad-based education that can serve as a basis for whatever might come. The more versatility we can give them, and the more we can teach them to teach themselves, the better. If we do that, if firms with high quality jobs know that well-trained, versatile workers are available, they will be much more likely to locate within the US.
It has to start with the understanding that it is in our collective interest to provide the funding that will be needed to give every single person the chance to succeed, from pre-school through college. Too much potential is being wasted.
Do more to help workers be rewarded for their productivity
Finally, and importantly, workers need to be able to capture the gains from increases in their productivity. Over the last several decades wages have managed to rise with the inflation rate, but they have not risen with productivity.
I believe this is mainly due to differences in bargaining power. When there is an increase in productivity, the gains are up for grabs. Will they go to the owners or the workers? When unions were strong, workers were able to bargain effectively to claim a large fraction of these gains for themselves. But as unions have faded, bargaining power has become increasingly one-sided, and those gains have gone mostly to those at the top of the income distribution.
This is a difficult problem to solve in a world where, when workers demand higher wages, firms can threaten to move to areas in the world where labor is very cheap. But we can certainly do more than we have done to support workers’ efforts to bargain on equal footing.
When forced to choose between worker and business interests, politicians have largely favored businesses. Perhaps the populist trends in the current election cycle are a sign that this will have to change. Let’s hope so. So long as business interests dominate the political process, it will be hard to reverse the trend toward increasing inequality.