Low Wages equals Less Spending, Less Jobs, Less Profits

The very basics of capitalism...supply and demand (although the "demand" should be before the "supply"). So what have so many of the economists been missing?

It’s tough finding a job these days. It’s even tougher to find one that’s full-time. More than four years after the recession ended, nearly a fifth of American workers are part-timers, well above normal levels. More than 8 million people are working part-time because they can’t find full-time jobs. That’s given rise to fears of deep, structural shifts in the U.S. labor market due to technology and globalization (or perhaps the new health care law, which will require companies to provide health insurance to full-time employees.)

But a new paper from the Federal Reserve Bank of San Francisco argues there’s a simpler explanation for the rise of part-time work --- the weak economy.

And another new paper from the Economic Policy Institute provides both diagnosis and prescription of what is arguably the fundamental problem of the United States economy in recent years --- wage stagnation. Findings from the report:

• Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution.
• For the entire period since 1979 (with the exception of the late 1990s), wage growth for most workers has been weak. The median worker saw an increase of just 5 percent between 1979 and 2012, despite productivity growth of 74.5 percent.

And it hasn't only been real wages that have lagged far behind productivity (or barely outpaced inflation), it’s average compensation (wages plus benefits) as well. Jared Bernstein:

Income is redistributed from paychecks to profits. That’s a characteristic of growing inequality and flows quite simply from the observation that the economy’s growth has to be going somewhere. If it’s not flowing much to wages and benefits, it must be flowing to profits (this is the point of another new report from the institute). Why is this happening? Economists typically cite globalization and technological change, both of which increase the earnings prospects of skilled workers relative to the less skilled. But that’s far from the whole story. The E.P.I. report shows that the real wages of college-educated workers have also been flat over the last decade as well (although workers with advanced degrees have done better).

From the New York Times: How Technology Wrecks the Middle Class - "Computerization has fostered a polarization of employment, with job growth concentrated in both the highest- and lowest-paid occupations, while jobs in the middle have declined." (This is known as job polarization.)

Four years into the economic recovery, U.S. workers' pay still isn't even keeping up with inflation. The average hourly pay for a non-government, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show. Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation's economic growth.

With more and more people working less hours and being paid less, they don't have the money to spend (creating "demand") so employers have no need to ramp up production (providing a "supply") and therefore have no need to hire additional people. It's been a downward spiral.

And when an employer sees any demand at all, whenever possible they produce with automation or cheaper labor abroad to increase profits because of CEO "incentive pay". If the government were to cap CEO pay, maybe they'd have less of an incentive to outsource or automate --- and instead, the employers can start rewarding their workers for their increased productivity by paying them betters wages...which would enable them to buy more (create "demand") and maybe employers will need to hire more people to keep up with the "supply" side of the capitalistic equation.

We can start with the minimum wage, which was much higher in 1968 than it is today. The minimum wage should be $16.54 today.

In 1963 when John Kennedy was in the White House, the minimum wage, when adjusted for inflation, was $8.37 --- a dollar and 12 cents higher than today's rate of $7.25.

Sylvia A. Allegretto and Steven C. Pitts lay out the math in a paper for the Economic Policy Institute. At its highest point (in inflation-adjusted dollars) the minimum wage was $9.44 in 1968. It's 23 percent lower now. And despite those who claim that a higher minimum wage leads to greater unemployment, the official unemployment figure in August of that year was 3.5 percent, less than half the current rate of 7.4 percent.

Productivity has risen - but working people have seen none of the resulting wealth. As Lawrence Mishel and Heidi Shierholz, also of the Economic Policy Institute, note: "During the Great Recession and its aftermath (i.e., between 2007 and 2012), wages fell for the entire bottom 70 percent of the wage distribution, despite productivity growth of 7.7 percent."

In fact, as Dean Baker and Will Kimball point out, "If the minimum wage had kept pace with productivity growth it would be $16.54 in 2012 dollars" - and that's using a conservative estimate of that growth.

Instead all of the resulting wealth has flowed to the wealthiest 1 percent in this country. That's no accident. It's the result of decisions made in corporate boardrooms, in the corridors of power, and in those corrupted places where those two settings merge into one.

Recently Obama has been asking for more teachers to teach STEM skills to our students, but he should already have known that there are many unemployed engineers. In fact, the U.S. Census had put the number at 1.8 million. And in a study by the Economic Policy Institute, they found that the United States has more than a sufficient supply of workers available to work in STEM occupations.

There are many older workers experiencing long-term unemployment who already have STEM skills and higher educations. But if American CEOs are going to constantly offshore those jobs to foreigner workers (or use H-1B visas to import foreign workers) who have the same exact skills (but will work for less), then what's the point of training more? And the same can be said for those with manufacturing or other skills.

Maybe the CEOs should be more focused on long-term growth (and boosting the domestic economy) instead of always using whatever means possible (like stock buy-backs) to acquire the quickest short-term gains.

Billionaire Larry Ellison of Oracle (who raked in over $92 million last year) once claimed the title for the world’s longest super yacht with his 454-foot Rising Sun. Maybe if these CEOs didn't feel the need to buy a bigger yacht every year, maybe more people could buy yachts too (and hire more DOMESTIC yacht builders.