Graph of the Day: Putting the Squeeze on Labor, Part II
Yesterday I commented on what Mark Thoma and Karl Smith both identified as one of the most significant graphs in the White House’s Economic Report of the President. That graph showed how the historical post-war relationship between wages and prices—or more fundamentally, between labor and capital—has broken down over the last thirty years. You can probably guess who has gotten the short end of the stick. Traditionally it has been the case that a competitive market prohibits businesses from raising prices too high or pushing labor costs too low, as both consumers and labor will look elsewhere for a better price. And historically, that dynamic has held: from 1947 until the mid-1980s, American wage earners accrued a proportionate share of economic output as productivity rose. But since the Reagan Revolution, corporate profits have surged while wages have flatlined, breaking the post-war trend that essentially created the American middle class. As I argued in my previous post, the present imblanace between capital and labor is unlike anything we have experienced in two generations. A global oversupply of labor and skill-biased technological change account for much of this inequality. But we cannot ignore that “laissez-faire” policies have encouraged this unprecedented redistribution of wealth to the richest 0.1%, while diminishing social mobility for the poor. Regressive tax policies that privilege capital gainsand loopholes like the carried-interest deduction have created the conditions that allow the Forbes 400 to control as much wealth as 150 million Americans while paying an average tax rate of just 18 percent. We cannot accept that disparity as the new normal.
Graph of the Day: Putting the Squeeze on Labor
The White House’s new Economic Report of the President—broadly, an annual overview of how the president and his Council of Economic Advisors (CEA) view the state of the economy—is generally optimistic for 2012, noting better-than-expected job growth and economic expansion for ten straight quarters. It also underscores just how severe the financial crisis was that the president faced, with revised estimates showing that the economy contracted at an 8.9 percent annualized rate in the last quarter of 2008, not the 3.8 percent initially claimed.
The outlook on wages, productivity, and prices is less rosy. The CEA notes ominously that for the first time since World War II, the historical link between wages and prices has broken. For the last ten years, inflation has been driven by rising price markup, while unit labor costs have fallen behind productivity gains. In other words, prices are increasing and corporate profits are soaring—but workers are being left behind, with labor share of output (the inverse of price markup over labor unit costs) at its lowest level in seventy years.
On the one hand, that means there is now considerable slack in the labor market, so the CEA can predict that the economy has plenty of room to expand without creating inflationary pressures. But it also indicates a tectonic shift, since the Reagan Revolution, in the relationship between unskilled labor and capital. If this new trend holds, then we are looking at an economic environment that is unlike anything we have experienced in the post-war era. Karl Smith is more blunt: “At its heart the issue is that Industrialization Really Was Different, and there is no reason to think it will come again. The reality of this new world is that you cannot simply work hard and make a good living.”
In a way, he’s right. The post-war era really was a unique time in American and economic history, with wage compensation tied to productivity growth—a rising tide that lifted all boats mostly equally. The past several decades have seen that relationship erode, as manufacturing and union jobs disappeared overseas, and corporations sought massive gains in competitiveness and profit at the expense of labor. Globalization and technology share much of the blame, but it is also instructive to look at the experience of other industrialized countries, many of which have been able to mitigate soaring income inequality with education and industrial policies designed to equalize opportunity and share the benefits of economic growth. Once, around the turn of the twentieth century, enterprising young progressives headed to Europe to study policy, returning to America with the seeds of what would become the New Deal, and later, the Great Society. Perhaps it is time, once again, to look abroad for answers.
