O'BRIEN: Wage growth requires changes in course
Opinions Column: Policy Over Politics
The American economy is currently experiencing its longest stretch of continuous job growth in recorded history. For 87 months in a row, more jobs have been added than lost, with the unemployment rate plunging to just 4.1 percent. Long-term unemployment, once a symbol of the slow recovery, has finally normalized. In other words, the job market is strong.
Yet after these eight years of steady progress, the economy continues to feel fundamentally broken to most Americans. The middle class sees the system of broad prosperity and mobility, which once made the United States the envy of the world, at risk of falling apart. No set of economic data better encapsulates this era of false promise and resentment better than the last four decades of stagnant wage growth.
Last month’s jobs report from the Department of Labor showed median wages grew just 2.5 percent last year, barely topping inflation. Despite the tightest job market in two decades, the real earnings of the median worker hardly budged. The economic orthodoxy that dominates mainstream politics posits that as unemployment dips this low, wage growth should accelerate as employers compete for the shrinking pool of idle labor. Unfortunately, this link has mostly disappeared since the 1970s. For all the nostalgia over President Ronald Reagan's economic expansion, real wages actually declined over that period and have not improved much in successive business cycles.
It was not always this way. There was once a time when the average worker’s wages rose with productivity. , from 1948 to 1973 the productivity of the American worker increased by an astounding 96.7 percent and wages followed closely behind, rising 91.3 percent. From 1973 through 2016, though productivity rose another 73.7 percent, hourly pay rose just 12.5 percent. How do we reverse this daunting trend and spur widely-shared growth?
Conservatives in Washington, D.C. argue that only doubling down on the last four decades of failure is the answer. They claim that only if government further deregulates the financial system, cuts taxes on the wealthy even more and finally cripples what few unions remain, it can unleash a wave of equitable growth. But if this has not worked over the last 40 years, why would we expect it to now?
The strict regulatory regime in the financial sector that emerged from the New Deal has been steadily dismantled since the 1970s, allowing massive growth in both the size and scope of banks. Instead of unleashing broad prosperity through increased access to credit, this move produced an historic asset bubble and a recession that hit the poor the hardest. The industry is currently raking in record profits and sitting on , but we are supposed to believe that over-regulation is now the problem?
The warped logic of the recently passed tax cut also fell along these same lines. Despite massive reductions in top tax rates failing to produce middle class wage growth over the past 40 years, conservatives say it must be the answer now. But if bringing the top marginal income tax rate down from 70 percent in 1980 to 39.6 percent today did not unleash broad wage growth, why would a further reduction of a few percentage points be any different?
Similarly, if unions truly are hoarding wage gains for themselves at the expense of unorganized labor, why has this period of wage stagnation occurred just as unions have all but disappeared from the private sector?
Our government continues to view wage growth through the narrow lens of tax policy, but it is really an issue of power. The problem is not a shortage of profits or capital, but a weakening of the channels by which workers negotiate for a fair share of the economic growth they produce. The economy is by no means a zero-sum game, but markets are two-sided affairs in which leverage matters, and for the last four decades, American workers have been steadily losing leverage. in part due to harsh “right to work” laws around the country. The and and other employer-friendly contracts have limited workers’ options. At the same time, restrictive zoning laws are preventing housing expansions in booming cities, .
We need to look beyond the tax code to solve the long-running problem of stagnant wages. While tax cuts may provide some short-term relief, they do little to produce real wage growth in the long-run. To do that, we need to rethink the power dynamics in our economy and start reversing, not embracing, the trends of the last few decades. Otherwise, the average American will continue to get stiffed.
Connor O'Brien is a School of Arts and Sciences junior majoring in economics. His column, "Policy Over Politics," runs on alternate Thursdays.
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