`New economy' means stagnant pay for most workers

September 03, 2006|By Jay Hancock | Jay Hancock,Sun Columnist

Ten years ago the Economic Policy Institute's biennial Labor Day report, The State of Working America, found that rising profits, productivity and growth were not resulting in decent wage gains for workers. For most employees, it said, "the changes in the economy have been `all pain, no gain.'"

The 2006 version sounds remarkably similar. There is a "stunning disconnect between rapid productivity growth and [stagnant] pay growth," EPI says. After inflation, "wages for the typical worker ... were about the same in 2005 as in 2001."

Will the rest of the story in 2006 be the same as in 1996? A decade ago, the gloomy EPI report turned out to be a preamble to prosperity, as the late '90s boom raised pay for almost everybody.

But you might not want to bet on a repeat.

The 2000s differ from the 1990s in crucial ways, and the "new economy" is running out of time to show it can broadly benefit middle America.

If we're still watching the same movie next year, the nation should have a serious discussion about raising the federal minimum wage, compensating workers displaced by globalization and making the tax code more progressive.

Economists will argue about the details of the liberal EPI's research. But the fortunes of the American worker have indisputably trailed the fortunes of capital the past five years.

Even as worker output per hour has soared, fueling the kind of corporate profits not seen in decades, average annual wages fell slightly after inflation from 2000 to 2004, the latest year for which EPI's data series had figures, the think tank says. The Labor Department's employment cost index, which presents more recent results, shows post-inflation wage gains from 2000 through 2003 but losses in 2004 and 2005.

True, wages aren't the whole pay picture. They don't include benefits such as medical insurance.

But even when benefits are included, total compensation per hour has barely kept ahead of inflation.

After hitting 4.5 percent in 1997 and 3.7 percent in 2000, average after-inflation, hourly pay increases were only 1.7 percent in 2003, 0.9 percent in 2004 and 1 percent last year, according to the Labor Department.

And the value of benefits, let's remember, has been puffed up by soaring health care costs.

Even though higher insurance premiums paid by your employer are part of your compensation, they don't put dollars in your checking account.

Wages and salaries now make up the leanest or close to the leanest (analyses differ but the trend is clear) share of the economy since the government started keeping track. Meanwhile corporate profits are a bigger portion of the economy than since the late 1960s.

This wasn't supposed to happen. The robust, technology-led productivity growth of the past decade was expected to benefit employers and employees. Productivity is output per worker, and for centuries what an employee can produce has tracked closely with what an employee can earn, which is only natural.

But the relationship has broken down the last five years.

Backed by computers, barcode scanners and factory robots, workers have impressively boosted production of everything from dry cleaning to microchips. But most of the gains have gone into profits, not salaries.

Corporations sell more stuff with fewer workers, but they bank the extra revenue instead of giving raises. And workers whose jobs have been displaced by technology - which is often part of the productivity picture - have had difficulty finding similar positions elsewhere.

The reasons are familiar: Globalization and outsourcing have hurt job growth and limited U.S. labor demand. Americans with jobs don't feel secure enough to demand decent raises.

"The economist's mantra, that such [productivity] growth automatically leads to improved living standards, no longer holds," Economic Policy Institute economist Jared Bernstein told reporters last week.

Is he right?

Almost any economic assertion can be supported by evidence if you look in the right short-term period. But five years is not so short-term. And it's hard to tell how much longer the productivity party will last, which is a key difference between now and 1996, when it was just beginning.

A Commerce Department report last week showing a wage surge in the year's first half hints that the pay drought could be ending. But the forces believed to be suppressing pay haven't gone anywhere.

If we don't get a repeat of the pay growth of the late 1990s, the Congress and president elected in 2008 will have their work cut out.

jay.hancock@baltsun.com

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