Growth Is the Best Remedy for Wage Stagnation

(Bloomberg Opinion) -- Wages for the average American aren’t rising very quickly. Apart from a brief burst of growth in late 2014 and 2015, both average hourly earnings and total compensation (which includes health care and other benefits) have barely grown at all since 2010 when adjusted for inflation.

Americans haven't failed to notice the stagnation in their paychecks. Disaffection with the economy is growing, from the socialists who call for the end of capitalism to the Trump supporters who yearn for a return to the glory days of manufacturing and coal mining.

Older people, and those who look at historical data, know that the trend isn't recent. Wages have generally risen much more slowly since 1970 than they did in the golden decades of the postwar period:

Growth Is the Best Remedy for Wage Stagnation

It seems possible that recent wage stagnation is connected to the longer-term trend.

In reality, there are several trends. The first is sluggish productivity growth. Overall, the amount of material wealth in an economy is constrained by the amount of value that workers can create in an hour of work. This number, called labor productivity (or output per hour), stagnated from about 1973 through 1976, and once again since 2005. Without productivity growth, it’s impossible to get higher long-term wage growth.

But just because productivity grows doesn’t mean that wages are guaranteed to grow as well. Since about 1960, there has been a divergence between how much output the economy generates, and how much of that output flows to workers:

Growth Is the Best Remedy for Wage Stagnation

If the economy’s bounty isn’t flowing to workers, who is it flowing to? Owners of land and companies. The divergence between productivity and compensation is related to the falling labor share of income -- a trend that has manifested in countries around the world.

There’s also a third trend: wage inequality. The numbers above are averages, and include everyone from chief executive officers to janitors. In 2017, the average CEO made 312 times more than the typical worker, compared to only 20 times as much back in 1965. The Economic Policy Institute estimates that wages at the 95th percentile of the distribution rose at a 1.1 percent annualized clip from 2000 to 2015, while median wages rose at only a 0.1 percent rate, and wages at the 20th percentile fell.

So over the long term, there have actually been three trends holding down the typical American’s wages -- slow growth, the failure of compensation to keep pace with productivity, and rising wage inequality. There are plenty of theories that purport to explain some or all of these trends, including  globalization, falling unionization, the rise of information technology, technological stagnation, market concentration and the rise of finance.

But in the years since the Great Recession, the picture looks a bit different. The first trend, slowing productivity growth, has gotten worse. Labor productivity has risen only about 6.3 percent during  the past eight years. Compare that to the 32 percent increase during the period from 1997 to 2005.

Meanwhile, the second trend, falling compensation relative to productivity, seems to have halted, or at least paused:

Growth Is the Best Remedy for Wage Stagnation

As for wage inequality, the picture is a little more clouded; wages appear to be increasing faster at the bottom and the top of the distribution than in the middle. In the past couple of years, low-paid workers have done especially well, though of course that’s not enough to make up for decades of falling behind.

The fact that compensation has begun to keep up with productivity since 2010, but productivity itself has slowed, suggests that the policies needed to attack wage stagnation also need to change.

Policies explicitly aimed at making the division of income more equitable -- support for unions, regulation of the finance industry and policies to give employees more power in corporations -- are still important, because they might help workers regain ground they lost during the preceding decades. But there also needs to be a renewed  emphasis on growth.

Focusing on growth will mean identifying factors that are suppressing productivity -- for instance, the divide between increasingly large and powerful companies and a lagging field of weaker businesses. That may require stronger antitrust enforcement, to make sure that the most productive workers with the best ideas don’t become siloed within a handful of dominant companies. Another important policy is to spend more government money on research, creating the technologies that will ultimately drive the formation of new industries.

There are other potential policies to increase the productivity of American workers. Better education is always a goal, though people argue about how to accomplish that. Export incentives might help prod businesses to venture into global markets, finding new revenue sources and honing their skills by competing with the outside world. Ensuring that economic expansions run longer, with the help of accommodative monetary policy, could push companies to invest in the latest technology. So could giving workers time to build up their job skills and human networks before the next recession.

The challenges of inequality and weakened labor power have not gone away, nor has the damage wrought by these forces since the 1970s. But to focus only on these long-standing problems, and ignore the recent and ominous trend of slowing productivity, would be a mistake. Don’t forget about growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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