The Wages of Populism

The real median wage in the United States has barely grown since the 1970s. With wages not keeping up with productivity growth, inequality has skyrocketed. As Piketty and Saez show, “the bottom half of the income distribution in the US has been completely shut off from economic growth since the 1970s.” Wages today are actually lower than in 1979 for those at the bottom quintile. Worse, according to the IMF, “in inflation adjusted terms, more than half of the U.S. population has lower incomes today than they did in 2000”. Even though labor force participation has increased, the labor share of income declined from 64.5 percent of GDP in 1973 to 56.8 in 2017. Capital’s share of the pie has increased at the cost of the rest, in relative and absolute terms. Piketty and Saez note: “In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more.” They place this in context: “[a] ratio of 1 to 81 is similar to the gap between the average income in the US and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi.” Indeed, in 1975 the share of income going to the top 1 percent in the United States was similar to France, today it is closer to Brazil.

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After 30 years of trickle down economics, this is evidence that growth has not ‘trickled down.’ Piketty and Saez show that France, a country known for its interventionist state and strong unions, the real income of the bottom 50 percent has grown by 32 percent since 1980. This data is calculated before state transfers. The United States is a more dynamic economy than France, but it lacks the tools to distribute market incomes to the poor and working class. It lacks strong unions, which increases wages in the short run. It lacks universal programs in education and healthcare that increases wages in the medium to long run through higher human capital formation. Also, it lacks adequate minimum wages that boost the wages of the poorest.

It is not surprising that coincident with wage stagnation, social mobility has declined. As a recent World Bank report notes, “the sharp decline in absolute mobility in the United States between individuals born in the 1940s and those born in the 1980s was driven more by the unequal distribution of economic growth than the slowdown in aggregate growth since the 1940s.” Without universal healthcare, it comes as little surprise that American life expectancy has declined. The principal cause, deaths associated with poverty: drug overdoses and poor diet. Under the current administration, inequality enhancing policies are being doubled-down. But, the decline in social mobility and the worsening health outcomes pre-date the current administration and signal a serious problem for the functioning of the political system. As Hacker and Pierson argue in their book, Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class, “The foremost obstacle to sustainable reform is the enormous imbalance in organizational resources between the chief economic beneficiaries of the status quo and those who seek to strengthen middle-class democracy” (2010, 290). That is, the rich are better organized to defend their interests than the poor. This is true and explains a great deal, but their claim that structural features of the economy are of secondary import is debatable.

What has not been addressed is why is growth being concentrated at the top? This is a debate within economics, and I do not pretend to have the answer, but clues abound. Apart from policy decisions, there have been structural changes in the economy that affect all developed and developing countries. Growing inequality is a problem in almost all countries, as is the declining labor share of income. The United States represents the most extreme case among developed economies, due to weak state intervention in markets. If trickle-down was to work, it should be working now. Economic growth is very strong with unemployment at the lowest level since the 60s. Yet, wages are not increasing at a pace to reflect that reality.

A recent paper by IMF economists Yasser Abdih and Stephan Danninger delve deeper into the empirics to explain lackluster wage growth. They point out “Lower regional unemployment puts an upward pressure on wages of individuals, although this effect has become weaker since 2008.” (2018, 2) In addition, “…there is downward pressure on wage for individuals with occupations that are exposed to automation and offshoring, and in industries with a higher concentration of large firms” (Ibid). They show that “Workers in occupations with routinizable and offshorable tasks receive on average significantly lower wages than others, although there are important differences” (2018, 24; emphasis mine). These differences include the fact that, contrary to belief, white collar workers lose the most from automation (Ibid, 25). While low skilled workers lose the most from offshoring (Ibid). And high skilled workers are the biggest losers when it comes to firm concentration (Ibid). In the last case, the use of non-compete clauses reduces workers wages.

Tackling automation, trade and monoposy power are key to addressing the problem of wage stagnation and inequality. But, as Hacker and Pierson argue, the organized interests to protect rents in the US economy are strong. The populist solution of using bludgeons like tariffs and restricting mass immigration are ill-advised. It is also sub-optimal to push for higher rates of unionization and high minimum wages without raising productivity of workers. Rising the price of labor, especially in routine tasks, when the price of capital declines can lead to greater labor substitution and a lower labor share. Yet, the Reagan-era consensus is no longer viable as large swathes of the left and right are demanding policy change. Ideally, the United States should be joining other countries in seriously exploring the universal basic income (UBI) to begin to adjust to the potential of a post-work world for millions. Education and health reforms need to be implemented, such as a national daycare program and universal healthcare access. Education should be focused on skills formation, improving interpersonal socialization and problem solving. These steps will be essential to increasing human capital formation and social mobility. Also, expanded anti-trust legislation should look at monopsony; failing that, these firms should face higher taxation. Major and creative reforms are needed to recalibrate the economy towards a middle class democracy. The alternative will be demagoguery or worse.



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