Monday, August 18, 2014

U.S. Economy Hindered By Decades of Flat Wages

As most people know, the engine that drives the US economy is consumption. In fact, consumers account for 70 percent of the nation's GDP.

So, in order for the economy to function properly, consumers must have adequate incomes to fund all that consumption. Therein lies the problem.

The US economy has continued to struggle since the Great Depression due to an affliction of stagnant wages. In fact, as I've illustrated previously, the US economy has been slowing for decades, largely for this reason.

Adjusted for inflation, wages have been stagnant since the 1970s, reports the Milken Institute. That is a stunning revelation. This stagnation, in conjunction with the widespread prevalence of low-wage jobs, is hindering the economy.

The number of employees working in low-wage jobs has been rising since 1979, according to John Schmitt, senior economist at the Center for Economic and Policy Research.

Though these disturbing trends have been decades in the making, the consequences are now being felt more than ever.

According to the Economic Policy Institute, “the vast majority of U.S. workers—including white-collar and blue-collar workers and those with and without a college degree—have endured more than a decade of wage stagnation.”

Predating the Great Recession (between 2000 and 2007), the median worker experienced slow wage growth of only about 2.6 percent per year, and from 2007- 2012 (during the recession and post-recession hangover) wages fell, which, in essence, means that wages have remained flat.

This has depressed demand and consumption, holding back the economy in the process.

It's no surprise that if Americans don't have adequate incomes they can't spend the economy into robust growth.

Out of 34 industrialized countries, the U.S. had the highest share of employees doing low-wage work in 2009, according to OECD data.

In fact, one-in-four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

To compensate for this, the US economy continues to be fueled by asset bubbles and escalating household debt.

However, as we all witnessed in the fall of 2008 when our nation's debt bubble finally burst, these responses result in some rather devastating outcomes. We're still living with the aftermath of the Great Recession.

Yet, while the typical American worker has fallen further and further behind through the years, the nation's top earners have thrived. The income of the top 1 percent nearly quadrupled from 1979 to 2007.

But no matter how rich they are, the top 1 percent cannot possibly buy enough stuff, or use enough services, to make up for the wage stagnation of the masses.

There has been a steady, long-term decline in the US economy over many decades.

The annual GDP growth rate in the United States averaged 3.25 percent from 1948 through 2014. However, since 2001, GDP has only reached at least 3 percent in two years: 2004 (3.8 percent) and 2005 (3.4 percent). In every other year, GDP failed to crack 3 percent.

In the 1950s and '60s, the average growth rate was above 4 percent. In the 1970s and '80s it dropped to around 3 percent. But in the last ten years, the average rate has been below 2 percent.

Our economic decline dovetails with the decline in wages through the years. There is no denying that four decades of stagnant wages have led to our continuing economic stagnation.

This is why we've become so reliant on household debt and the asset bubbles forged by the Federal Reserve to continue eking out marginal economic growth.

What's particularly perverse about this wage stagnation is that American workers have managed to be ever more productive. Though productivity grew 7.7 percent from 2007-2012, wages fell for the entire bottom 70 percent of the wage distribution.

The longer term trends are even more troubling.

The median worker saw a wage increase of just 5 percent between 1979 and 2012, despite productivity growth of 74.5 percent.

The last decade, however, was particularly bleak for American workers.

Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, notes the Economic Policy Institute, the vast majority of wage earners have already experienced a lost decade.

In reality, it's been more like lost decades.

This is the sad truth in the United States, the nation that most Americans like to believe is one of opportunity, promise and hope. However, the reality simply doesn't square with those lofty beliefs.

This nation cannot remain great when such vast numbers of its citizens are continually falling further behind — even the skilled and the educated.

The fact that so many workers are facing great financial struggles is particularly troubling when corporate profits are at historic highs.

The Economic Policy Institute describes the problem thusly:

"The weak wage growth since 1979 for all but those with the highest wages is the result of intentional policy decisions—including globalization, deregulation, weaker unions, and lower labor standards such as a weaker minimum wage—that have undercut job quality for low- and middle-wage workers."

Globalization notwithstanding, these are political problems manifested as economic problems. That is to say, monied, corporate interests have influenced lawmakers and gotten them to do their bidding.

It also means that these trends are reversible. However, that requires political will, integrity, and a determination to serve the citizenry, the masses, and the electorate.

Unfortunately, those qualities are in short supply in our nation's capital.