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Real Wages Fail to Match a Rise in Productivity

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  • Ram Lau
    http://www.nytimes.com/2006/08/28/business/28wages.html Real Wages Fail to Match a Rise in Productivity By STEVEN GREENHOUSE and DAVID LEONHARDT With the
    Message 1 of 1 , Aug 28, 2006
      Real Wages Fail to Match a Rise in Productivity

      With the economy beginning to slow, the current expansion has a chance
      to become the first sustained period of economic growth since World
      War II that fails to offer a prolonged increase in real wages for most

      That situation is adding to fears among Republicans that the economy
      will hurt vulnerable incumbents in this year's midterm elections even
      though overall growth has been healthy for much of the last five years.

      The median hourly wage for American workers has declined 2 percent
      since 2003, after factoring in inflation. The drop has been especially
      notable, economists say, because productivity — the amount that an
      average worker produces in an hour and the basic wellspring of a
      nation's living standards — has risen steadily over the same period.

      As a result, wages and salaries now make up the lowest share of the
      nation's gross domestic product since the government began recording
      the data in 1947, while corporate profits have climbed to their
      highest share since the 1960's. UBS, the investment bank, recently
      described the current period as "the golden era of profitability."

      Until the last year, stagnating wages were somewhat offset by the
      rising value of benefits, especially health insurance, which caused
      overall compensation for most Americans to continue increasing. Since
      last summer, however, the value of workers' benefits has also failed
      to keep pace with inflation, according to government data.

      At the very top of the income spectrum, many workers have continued to
      receive raises that outpace inflation, and the gains have been large
      enough to keep average income and consumer spending rising.

      In a speech on Friday, Ben S. Bernanke, the Federal Reserve chairman,
      did not specifically discuss wages, but he warned that the unequal
      distribution of the economy's spoils could derail the trade
      liberalization of recent decades. Because recent economic changes
      "threaten the livelihoods of some workers and the profits of some
      firms," Mr. Bernanke said, policy makers must try "to ensure that the
      benefits of global economic integration are sufficiently widely shared."

      Political analysts are divided over how much the wage trends will help
      Democrats this fall in their effort to take control of the House and,
      in a bigger stretch, the Senate. Some see parallels to watershed
      political years like 1980, 1992 and 1994, when wage growth fell behind
      inflation, party alignments shifted and dozens of incumbents were
      thrown out of office.

      "It's a dangerous time for any party to have control of the federal
      government — the presidency, the Senate and the House," said Charles
      Cook, who publishes a nonpartisan political newsletter. "It all feeds
      into `it's a time for a change' sentiment. It's a highly combustible

      But others say that war in Iraq and terrorism, not the economy, will
      dominate the campaign and that Democrats have yet to offer an economic
      vision that appeals to voters.

      "National economic policies are more clearly in focus in presidential
      campaigns," said Richard T. Curtin, director of the University of
      Michigan's consumer surveys. "When you're electing your local House
      members, you don't debate that on those issues as much."

      Moreover, polls show that Americans are less dissatisfied with the
      economy than they were in the early 1980's or early 90's. Rising house
      and stock values have lifted the net worth of many families over the
      last few years, and interest rates remain fairly low.

      But polls show that Americans disapprove of President Bush's handling
      of the economy by wide margins and that anxiety about the future is
      growing. Earlier this month, the University of Michigan reported that
      consumer confidence had fallen sharply in recent months, with people's
      expectations for the future now as downbeat as they were in 1992 and
      1993, when the job market had not yet recovered from a recession.

      "Some people who aren't partisans say, `Yes, the economy's pretty
      good, so why are people so agitated and anxious?' " said Frank Luntz,
      a Republican campaign consultant. "The answer is they don't feel it in
      their weekly paychecks."

      But Mr. Luntz predicted that the economic mood would not do
      significant damage to Republicans this fall because voters blamed
      corporate America, not the government, for their problems.

      Economists offer various reasons for the stagnation of wages. Although
      the economy continues to add jobs, global trade, immigration, layoffs
      and technology — as well as the insecurity caused by them — appear to
      have eroded workers' bargaining power.

      Trade unions are much weaker than they once were, while the buying
      power of the minimum wage is at a 50-year low. And health care is far
      more expensive than it was a decade ago, causing companies to spend
      more on benefits at the expense of wages.

      Together, these forces have caused a growing share of the economy to
      go to companies instead of workers' paychecks. In the first quarter of
      2006, wages and salaries represented 45 percent of gross domestic
      product, down from almost 50 percent in the first quarter of 2001 and
      a record 53.6 percent in the first quarter of 1970, according to the
      Commerce Department. Each percentage point now equals about $132 billion.

      Total employee compensation — wages plus benefits — has fared a little
      better. Its share was briefly lower than its current level of 56.1
      percent in the mid-1990's and otherwise has not been so low since 1966.

      Over the last year, the value of employee benefits has risen only 3.4
      percent, while inflation has exceeded 4 percent, according to the
      Labor Department.

      In Europe and Japan, the profit share of economic output is also at or
      near record levels, noted Larry Hatheway, chief economist for UBS
      Investment Bank, who said that this highlighted the pressures of
      globalization on wages. Many Americans, be they apparel workers or
      software programmers, are facing more comptition from China and India.

      In another recent report on the boom in profits, economists at Goldman
      Sachs wrote, "The most important contributor to higher profit margins
      over the past five years has been a decline in labor's share of
      national income." Low interest rates and the moderate cost of capital
      goods, like computers, have also played a role, though economists note
      that an economic slowdown could hurt profits in coming months.

      For most of the last century, wages and productivity — the key measure
      of the economy's efficiency — have risen together, increasing rapidly
      through the 1950's and 60's and far more slowly in the 1970's and 80's.

      But in recent years, the productivity gains have continued while the
      pay increases have not kept up. Worker productivity rose 16.6 percent
      from 2000 to 2005, while total compensation for the median worker rose
      7.2 percent, according to Labor Department statistics analyzed by the
      Economic Policy Institute, a liberal research group. Benefits
      accounted for most of the increase.

      "If I had to sum it up," said Jared Bernstein, a senior economist at
      the institute, "it comes down to bargaining power and the lack of
      ability of many in the work force to claim their fair share of growth."

      Nominal wages have accelerated in the last year, but the spike in oil
      costs has eaten up the gains. Now the job market appears to be
      weakening, after a protracted series of interest-rate increases by the
      Federal Reserve.

      Unless these trends reverse, the current expansion may lack even an
      extended period of modest wage growth like one that occurred in the

      The most recent recession ended in late 2001. Hourly wages continued
      to rise in 2002 and peaked in early 2003, largely on the lingering
      strength of the 1990's boom.

      Average family income, adjusted for inflation, has continued to
      advance at a good clip, a fact Mr. Bush has cited when speaking about
      the economy. But these gains are a result mainly of increases at the
      top of the income spectrum that pull up the overall numbers. Even for
      workers at the 90th percentile of earners — making about $80,000 a
      year — inflation has outpaced their pay increases over the last three
      years, according to the Labor Department.

      "There are two economies out there," Mr. Cook, the political analyst,
      said. "One has been just white hot, going great guns. Those are the
      people who have benefited from globalization, technology, greater
      productivity and higher corporate earnings.

      "And then there's the working stiffs,'' he added, "who just don't feel
      like they're getting ahead despite the fact that they're working very
      hard. And there are a lot more people in that group than the other group."

      In 2004, the top 1 percent of earners — a group that includes many
      chief executives — received 11.2 percent of all wage income, up from
      8.7 percent a decade earlier and less than 6 percent three decades
      ago, according to Emmanuel Saez and Thomas Piketty, economists who
      analyzed the tax data.

      With the midterm campaign expected to heat up after Labor Day,
      Democrats are saying that they will help workers by making health care
      more affordable and lifting the minimum wage. Democrats have
      criticized Republicans for passing tax cuts mainly benefiting
      high-income families at a time when most families are failing to keep up.

      Republicans counter that the tax cuts passed during Mr. Bush's first
      term helped lifted the economy out of recession. Unless the cuts are
      extended, a move many Democrats oppose, the economy will suffer, and
      so will wages, Republicans say.

      But in a sign that Republicans may be growing concerned about the
      public's mood, the new Treasury secretary, Henry M. Paulson Jr.,
      adopted a somewhat different tone from Mr. Bush in his first major
      speech, delivered early this month.

      "Many aren't seeing significant increases in their take-home pay," Mr.
      Paulson said. "Their increases in wages are being eaten up by high
      energy prices and rising health care costs, among others."

      At the same time, he said that the Bush administration was not
      responsible for the situation, pointing out that inequality had been
      increasing for many years. "It is neither fair nor useful," Mr.
      Paulson said, "to blame any political party."
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