Raising America’s Pay II. How Can We Do It?


My last post “Raising America’s Pay” addresses a new report from the Economic Policy Institute, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”.  Its starting point is the now generally accepted view that wages for the typical American worker have been flat ever since the early 1970s even though labor productivity has continued to rise steadily.
The EPI authors recognize that globalization and the growth of technology have contributed to wage stagnation even though they blame malign policy decisions as well.  I do agree with them that the resulting increase in economic inequality is detrimental to America.  I also agree with them that the way to address inequality is for wages to go up. The best way to accomplish this is to lower unemployment by increasing economic growth.  This will happen when large numbers of consumers start spending more money, thereby increasing demand.  Does this sound like a vicious circle?  It need not be!
CaptureThe above chart from the Wall Street Journal shows that the net worth of U.S. households has now more than recovered from the Great Recession.  The problem is that most of this new wealth has gone to the people with the highest incomes who are more likely to save it.  What we need to do is “redistribute” (gasp!) some of this vast sum of new wealth back to middle and lower income people who would be much more likely to spend it.
There is a straightforward way to do this.  Broad based tax reform!  Lower everyone’s tax rates paid for by closing loopholes and shrinking deductions which primarily benefit the wealthy.  This will be a pure gain in income for the two thirds of Americans, about 80 million, who pay income taxes but do not itemize deductions, most of whom are in the lower and middle income brackets.  These people are likely to spend most of their new income, thus giving the economy the big boost that it needs!
Our leaders in Washington should be able to figure this out!

Raising America’s Pay


The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”.  It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate.
CaptureFirst of all, the authors make reasonable arguments that:

  • The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
  • Wage stagnation stalls progress in reducing poverty.
  • Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.

Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?”  Here is where the report becomes controversial!

  • The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
  • Falling top tax rates have increased the income share of the top 1 percent.
  • The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
  • The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.

The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time.  The question, of course, is how to address this problem most effectively.  In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished.  I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI.  We have a lot to look forward to!