Sources of Wage Stagnation

With the publication of Thomas Piketty’s Capital, and the intense conversation, debate, and reviews that have followed, there has never been a greater focus on the issue of income inequality. One of Piketty’s central findings is that in capitalist economies the long term trend is one where the economic returns on capital wealth exceed the growth rate and returns to labor in wages (or in his formulation r>g). This challenges the various claims about the essential fairness of capitalism with regard to earned and unearned income, and suggests the long-term trend will be a further widening of the gap between labor and capital, the working class and the capitalist class, the 99% and the 1%.

While this may be the long-term pattern of unbridled capitalism, when one examines inequality in the United States there are some clear policy decisions and political-economic actions that have contributed to the currently record high levels of income and wealth inequality. The Economic Policy Institute has released two reports recently that illuminate some of the causes and, accordingly, point to the way political efforts and actions can either exacerbate or moderate the general tendencies of capitalism. This is important lest one assumes there is nothing that can be done to counter the natural market forces.

One report focuses, appropriately, on the specific problem of “wage stagnation”. Economies can grow, profits can be collected, Wall Street can boom, but wages can stagnate or actually decline. This has been the US pattern. Among the causes they cite a lack of commitment to full employment, declining union density, labor market policies and practices of government and business, the impact of financialization on the fortunes of the 1%, and globalization.

On the matter of full employment, the two central macroeconomic objectives – low inflation or low unemployment – have never been on an equal footing. There has always been a greater concern about high inflation than high unemployment, and the record of the Federal Reserve bears this out. There is a class basis for the preference. High unemployment does not threaten the capitalist class in the same way that inflation, and the associated decline in the value of capital assets, does. Thus, if one has to choose, it is inflation that is slayed by government policy first and foremost. It is also the case, as noted in a prior posting here, that high unemployment is more beneficial to the capitalist class than low unemployment because it keeps wages low and weakens the bargaining power of labor.

In the other report recently posted by the EPI, they take a closer look at one of these five factors – union density, which is a measure of the collective bargaining power of workers. I would regard this as one of the most important factors that is neglected in Piketty’s analysis and which helps us understand one of the central problems facing U.S. capitalism. This is the divergence between productivity and wages. This can be seen clearly in the following figure included in this report.

  

This would indicate that the assumption that labor is compensated on the basis of productivity is not an iron-clad law in market economies. In fact, it depends on the balance of social class power.   For the immediate post-WWII period, productivity and compensation moved in lock step together. This was also the period we associate with the “labor-capital accord” where labor, through collective bargaining agreements in major industries, was willing to concede control of the workplace to managers if they were also guaranteed regular wage increases on the basis of the rising productivity.  With the economic crisis of the 1970s, and the introduction of neoliberal economic policy, that accord was terminated and as union density decreased this wage-productivity gap also increased. 

This is further demonstrated in the second figure included in the report using state-level data:

States with the largest decline in collective-bargaining coverage, experience the smallest increases in real hourly compensation growth. A factor highly correlated with both of these variables is the decline in manufacturing employment in the states as capital shifted industry south and then abroad. Note the position of Michigan as the prototype of this pattern at the far bottom right corner, actually experiencing negative growth.

There is one policy implication that should be obvious from this analysis. Without labor power – and this can be accomplished through unionization, collective bargaining, worker ownership and control – it is unlikely that there will be any change in the long-term prevailing pattern of wage stagnation and inequality. Not only does labor organization at the workplace produce economic benefits for workers, it also politicizes and mobilizes workers which translate into greater political power in the electoral arena. Ideally, there would be a broad collation and political party that represented labor’s interests. The Democratic Party does not, cannot, and will not do this.

A final point about Piketty’s work on inequality. While largely embraced by those on the left for exposing the inherent inequality generated systemically by the workings of capitalism, Piketty operates in a conventional economic paradigm and makes no effort to address social class relations. He should not be faulted for this as he is candid about his theoretical orientation and his primary objective is to understand the long run tendencies in capitalist economies. But when you take these social class relations, and relative power positions, as given, then you end up with a certain policy prescription for addressing inequality. For Piketty, this involves taking the unequal distribution generated by the economy, and then subjecting it to a “confiscatory” tax on the rich that would allow for redistribution. One alternative, suggested by the analysis above, is to create a more equal distribution at the organizational or workplace level through greater worker bargaining power.