Social Democratic America (11 page)

What are the prospects for earnings going forward? Household earnings can rise in two ways: higher wages and more employment. From the 1940s through the mid- to late-1970s, much of the growth in household incomes for working-age Americans came from rising wages.
⁵²
But as
figure 3.7
shows, since the late 1970s inflation-adjusted wages in the bottom half have barely budged.

FIGURE
3.6 Change in lower-half households' earnings and net government transfers, 1979–2005

Earnings and net transfers are adjusted for inflation using the CPI and converted to US dollars using purchasing power parities.
Data source
: Luxembourg Income Study,
www.lisdatacenter.org
.

FIGURE
3.7 Wages

Hourly wage at the fiftieth (median) and tenth percentiles of the wage distribution. 2011 dollars; inflation adjustment is via the CPI-U-RS.
Data source
: Lawrence Mishel et al.,
The State of Working America
, stateofworkingamerica.org, “Hourly wages of all workers, by wage percentile,” using Current Population Survey (CPS) data.

In the post-World War II golden age, many American firms faced limited product market competition, limited pressure from shareholders to maximize short-term profits, and significant pressure from unions (or the threat of unions) to pass on a “fair” share of profit growth to employees. These three institutional features are gone, and it's unlikely that they will return. Moreover, a host of additional developments now push against wage growth: technological advances (computers and robots), the continuing decline of manufacturing jobs, new opportunities to offshore mid-level service jobs, an increase in less-skilled immigrant workers, the growing prevalence of winner-take-all labor markets, a shift toward pay for performance, and minimum wage decline.

In the one brief period of nontrivial wage growth in the past generation, the late 1990s, the key seems to have been a tight labor market.
⁵³
The unemployment rate dipped below 4 percent, the lowest since the 1960s. It would be good to repeat this, but I suspect it won't happen. The next time our unemployment rate gets near 4 percent, the Federal Reserve is more likely to slam on the brakes by raising interest rates. In the late 1990s, Fed chair Alan Greenspan held interest rates low despite opposition from other
Fed board members who worried about potential inflationary consequences of rapid growth, rising wages, and the Internet stock market bubble. Greenspan's belief in the self-correcting nature of markets led him to worry less than others. Given the painful consequences of the 2000s housing bubble, the Fed is highly unlikely to repeat that approach.

So for Americans in middle- and lower-paying jobs, prospects for rising wages going forward are slim.

Employment is the other potential source of rising earnings. Indeed, as I noted in
chapter 2
, it's the chief reason there has been any increase at all in household incomes since the 1970s. We also need employment to fund generous social programs. Tax rates need to increase, as I discuss in
chapter 4
, but we also need a larger tax base, in the form of more people employed.
⁵⁴
About 85 percent of prime-working-age males and 70 percent of prime-working-age females were employed as of 2010. We may see no further increase among prime-age men, but among women and the near elderly (aged 55–64) there is substantial room for growth.

The United States has a set of institutions and policies that in theory should be conducive to rapid employment growth: a low wage floor, limited labor market regulation, relatively stingy government benefits, and low taxes. Up to the turn of the century, we were comparatively successful. As
figure 3.8
shows, during the 1980s and 1990s the employment rate among 25- to 64-year-olds rose by seven percentage points—better than most other rich nations.
⁵⁵
Some commentators labeled our economy the “great American jobs machine.”

But in the 2000s the bloom fell off the rose.
⁵⁶
The early years of recovery after the 2001 recession featured feeble job growth, and things didn't improve much after that. By the peak year of the 2000s business cycle, 2007, the employment rate had not yet reached its prior peak.
⁵⁷
And during the subsequent economic crash nearly all the progress of the 1980s and 1990s was erased.

What happened? We don't know. It may be that economic and institutional forces—strong competition, the shareholder value orientation in corporate governance, Wall Street's appetite for downsizing, weakened unions—have made management reluctant to hire.
⁵⁸
Perhaps it was manufacturing jobs fleeing to China and service jobs shifting to India.
⁵⁹
Or perhaps the computer-robotics revolution finally began to hit full force.
⁶⁰
Maybe it was a combination of these and other factors. Whatever the cause, it doesn't bode well for employment going forward.

FIGURE
3.8 Employment rate

Employed share of persons aged 25 to 64. The vertical axis does not begin at zero.
Data source
: OECD, stats.oecd.org.

So there is reason to worry about both wages and jobs. What can we do? Let's begin with employment.
⁶¹
First, adequate demand is essential. When our economy finally emerges from the aftermath of the great recession, it may struggle in the absence of a 1990s- or 2000s-style stock market or housing bubble to fuel consumer spending. Rising living standards in developing nations should help by boosting American exports, and government job creation can enhance domestic spending. But demand is a significant question mark going forward. Second, as I suggested earlier, high-quality, affordable early education would help by facilitating mothers' employment. Third, we would do well to expand provision of individualized assistance for those who struggle in the labor market. This is expensive, but it helps.
⁶²
Fourth, government can
directly promote job creation by subsidizing private-sector job growth and creating public-sector jobs.
⁶³

The better our educational system, the more Americans are likely to work in professional analytical jobs. But a nontrivial share of the jobs in our future economy will be low-end ones.
⁶⁴
Rather than fight this, we should embrace it. As we get richer, most of us are willing to outsource more tasks we don't have the time or expertise or desire to do ourselves—changing the oil in the car, mowing the lawn, cleaning, cooking, caring for children and other family members, and much more. This can be a win-win proposition if we approach it properly. We need more Americans teaching preschool children, helping people find their way in the labor market and transition to a new career in midlife, and caring for the elderly.
⁶⁵
Improved productivity and lower wage costs abroad reduce the price we pay for manufactured goods and some services. This enables us to purchase more helping-caring services and more of us to work in helping-caring service jobs.
⁶⁶

But some of these jobs, perhaps many of them, won't pay enough to ensure a good standard of living. And as I've noted, the experience of the past several decades suggests that pay likely won't improve over time.

The solution has two parts. First, we should increase the minimum wage a bit and, more important, index it to prices so that it keeps pace with the cost of living.

The second element is a government program that can compensate for stagnant or slowly-rising wages in a context of robust economic growth—insurance against decoupling, if you will.
⁶⁷
We could do this by building on the EITC. The ideal, in my view, would be to give it to individuals rather than households, increase the benefit amount for those with no children, give it to everyone with earnings rather than only to those with low income, and tax it if household income is relatively high. Most important, we could index it to average compensation or to GDP per capita.
⁶⁸
This would help restore the link between growth of the economy and growth of household incomes.
⁶⁹

The real value of the minimum wage and the restructured EITC will need to be adjusted periodically. Rather than relying on Congress and the president to come to agreement, I recommend delegating this task to an independent board, similar to the Federal Reserve board and the new Independent Payment Advisory Board for Medicare in that its members would be nominated by the president and confirmed by the Senate but it would have independent decision-making authority.

I've outlined a number of new programs and some expansions of existing ones that would enhance economic security, expand opportunity, and ensure rising living standards for Americans. They include the following:

• Universal health insurance

• One year of paid parental leave

• Universal early education

• Increased Child Tax Credit

• Sickness insurance

• Eased eligibility criteria for unemployment insurance

• Wage insurance

• Supplemental defined-contribution pension plans with automatic enrollment

• Extensive, personalized job search and (re)training support

• Government as employer of last resort

• Minimum wage increased modestly and indexed to prices

• EITC extended farther up the income ladder and indexed to average compensation or GDP per capita

• Social assistance with a higher benefit level and more support for employment

• Reduced incarceration of low-level drug offenders

• Affirmative action shifted to focus on family background rather than race

• Expanded government investment in infrastructure and public spaces

• More paid holidays and vacation time

The American economy's performance in coming decades is likely to be similar to what we've experienced since the 1970s: reasonably healthy economic growth, a modest increase in the employment rate, a rise in the likelihood of losing a job, little or no improvement in inflation-adjusted wages for earners in the lower half, growing inequality of market household incomes, and little rise in wealth for middle- and low-income households. Economic pressures will continue to intensify. Risks will continue to grow. Families, civic organizations, and unions will remain weak. In this context, the policies I've recommended here won't eliminate the problems of economic insecurity, inadequate opportunity, or slow income growth. In fact, they might not fully compensate for these adverse shifts in our economy and society. Better policies won't guarantee better outcomes.