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NY Times, Oct. 7 2014
The Great Wage Slowdown of the 21st Century
by David Leonhardt
American workers have been receiving meager pay increases for so long
now that it’s reasonable to talk in sweeping terms about the trend. It
is the great wage slowdown of the 21st century.
The typical American family makes less than the typical family did 15
years ago, a statement that hadn’t previously been true since the Great
Depression. Even as the unemployment rate has fallen in the last few
years, wage growth has remained mediocre. Last week’s jobs report
offered the latest evidence: The jobless rate fell below 6 percent, yet
hourly pay has risen just 2 percent over the last year, not much faster
than inflation. The combination has puzzled economists and frustrated
workers.
Of course, there is a long history of pessimistic predictions about dark
new economic eras, and those predictions are generally wrong. But things
have been disappointing for long enough now that we should take the
pessimistic case seriously. In some fundamental way, the economy seems
broken.
I probably don’t need to persuade most readers of this view, so the
better way to think about the issue may be to consider the optimistic
case. And last week, in his most substantive speech on domestic policy
in months, President Obama laid out that case.
It included the usual set of glass-half-full statistics and
wishful-thinking proposals that officeholders talk about during
political campaigns. More notable, though, was that Mr. Obama – speaking
at Northwestern University – explained why he thought wage growth was
likely to pick up.
“If we take the necessary steps to build on the foundation,” he said,
after a litany of the good news, “I promise you, over the next 10 years
we’ll build an economy where wage growth is stronger than it was in the
past three decades.”
He may or may not be right about that. But the speech laid out the
issues in unusually clear terms. And by any definition, the great wage
slowdown – or its end – is one of the most important subjects in the
country today.
You can think of Mr. Obama’s argument as falling into two categories
(even if he didn’t say so): the reasons that overall economic growth may
accelerate, and the reasons that middle- and low-income workers may
benefit more from that growth than they have lately. Both factors have
contributed to the wage slowdown. The size of the pie hasn’t been
growing very fast, and most of the increases have gone to a small share
of already well-fed families.
On the growth side of the ledger, both energy and education have been
problems. The cost of energy, after temporarily falling in the 1990s,
returned to its post-1970s norm in recent years and acted like a tax on
the rest of the economy. Education, meanwhile, is the lifeblood of
economic growth, allowing people to do entirely new tasks (cure a
disease, invent the Internet) or to do old ones with less time and
expense. Yet educational attainment has slowed so much that the United
States has lost its once-enormous global lead.
On both fronts, the country has been making progress, Mr. Obama rightly
noted. The fracking boom and a more modest clean-energy boom have
increased this country’s share of energy production and held down costs
worldwide. The price of oil has been mostly flat for three years.
And the number of high-school and college graduates is rising. The
financial crisis deserves some perverse credit, because it sent people
fleeing back to school, much as the Great Depression did. But some of
the efforts to improve school performance – by raising standards and
accountability – are also playing a role.
Last year, 33.6 percent of 25- to 29-year-olds had a four-year college
degree, up from 30.8 percent in 2008, according to the National Center
for Education Statistics. That leaves a lot of room for further
improvement, but it’s more progress than in prior years. In 2000, the
share was 29.1 percent.
Mr. Obama didn’t mention her in the speech, but another reason for
optimism at the White House is Janet Yellen, who took over the Federal
Reserve this year. Under Ben Bernanke, her predecessor, the Fed was
heroically creative in fighting the financial crisis. After the crisis,
though, Fed officials made the same mistake repeatedly: overestimating
the health of the economy. Ms. Yellen has suggested that she’s learned
that lesson and will be even more aggressive about trying to lift growth
with low interest rates.
As far the other entry in the ledger, the biggest reason to think
economic growth may translate more directly into wage gains is the
turnabout in health costs. After years of rapid increases, they have
slowed sharply in the last three years. Mr. Obama likes to give more
credit to the 2010 health care law than most observers do, but he’s not
wrong about the trend’s significance.
Health costs take a direct bite out of paychecks. Employers don’t have
some secret stash of money to pay for health insurance; when it becomes
more expensive, there is less money left for salaries. It’s no accident
that the best period of wage growth in the last 40 years – the late
1990s – was also a period of quiescent health inflation.
If you’re skeptical that these trends are actually encouraging, take a
minute to play an alternate-history game. Imagine someone had come to
you a few years ago and predicted that health inflation would slow
sharply, that the cost of oil would be flat, that the United States
would soon produce more oil than it imports and that both the
high-school and college graduation rates would rise. Most of us would
not have replied: Yeah, that all sounds right.
But here’s where I become less optimistic than the president. Imagine
that same prognosticator had added one more bit of clairvoyance: Despite
all those positive trends, the real median weekly pay of full-time
workers in mid-2014 would be slightly lower than in it was mid-2011. Or
than it was in mid-2008, the year before Mr. Obama took office. Or in
mid-2000.
It’s certainly possible that we’re on the verge of a pay surge, much as
we were in the mid-1990s, when the situation also seemed bleak. It’s
also possible that the forces behind the great wage slowdown – from
globalization to our often-sclerotic government to (at least for many
workers) technological change – are still more powerful than the
positive forces. In that case, the wage slowdown won’t end until the
country makes much more progress in improving education, cutting medical
waste and energy costs and creating a more responsive, nimble government.
Either way, the great wage slowdown, or the end of it, will help set the
tone for American life in the coming decade. It has already done so in
the century’s first 15 years, causing widespread unhappiness with the
country’s direction and leading voters to shift partisan directions
multiple times. The political turmoil isn’t likely to end until the
economic reality changes.
The Upshot provides news, analysis and graphics about politics, policy
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