Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.
A 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. I’ll briefly describe the findings, but given that these trends have persisted for a long time, it’s more important to think about solutions, particularly ones that go beyond conventional wisdom.
From the report:
Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, the vast majority of wage earners have already experienced a lost decade, one where real wages were either flat or in decline.
This lost decade for wages comes on the heels of decades of inadequate wage growth. For virtually the entire period since 1979 (with the one exception being the strong wage growth 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 â€" while the 20th percentile worker saw wage erosion of 0.4 percent and the 80th percentile worker saw wage growth of just 17.5 percent.
As the chart below shows, it’s not only real wages that have lagged far behind productivity (or barely outpaced inflation), it’s average compensation (wages plus benefits) as well. The chart shows indexes of two related compensation measures plotted against productivity growth. After growing a bit in the early 2000s, they’re both about where they were 10 years ago.
Economic Policy Institute Sources: Authors’ analysis of the Bureau of Labor Statistics’ unpublished Total Econoy Productivity data, and Employment Cost Index and Employer Costs for Employee Compensation public data series. Note: Productivity series reflects the total economy, while the other two reflect the compensation of all private workers. Employer Costs for Employee Compensation data are linearly interpolated between the first quarters of 2000 and 2001, and between the first quarters of 2001 and 2002 (no formal data exists for the second, third and fourth quarters in 2000 or 2001). Only the Employment Cost Index had data available for the second quarter of 2013.The arithmetic of national income accounting is such that when average compensation lags behind productivity growth, as has been the norm in recent years, 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 been flat over the last decade as well, though workers with advanced degrees have done better.
Also, the college wage premium â€" the wage advantage held by college-educated workers over the less educated â€" grew much more slowly over the last decade compared to the prior 20 years, posing a challenge to the notion that skills can either explain or solve wage stagnation. To be clear, there is little question that more educated workers are likelier to capture some of the economy’s growth than those with lesser skills or training. But the wage data show that upgrading skills alone is an incomplete solution.
In fact, we need to think about solutions to this problem is a new way. To explain, let me introduce some terminology. The primary distribution is the income, wage and wealth status of households generated by market outcomes, before taxes and all kinds of other policies kick in to help those on the short end of those outcomes (i.e., transfer policies, like food stamps or unemployment insurance). The secondary distribution is the income distribution after taxes and transfers.
Of course, policy plays a role in market outcomes. The primary distribution is not some pristine, meritocratic outcome devoid of political or policy influence. Trade policy, for example, creates winners and losers; the tax system itself, by favoring investment income over wage income, tilts market outcomes.
Still, the distinction is important. Consider this: when it comes to economic policy, the difference in recent years between Democrats and Republicans, or most liberals versus conservatives, is that the former are willing to alter the secondary distribution through more progressive taxes and transfers. The latter are content to leave market outcomes alone.
But neither wants to alter the primary distribution.
This poses a serious problem. To accept market outcomes as given, and then try to offset the structural imbalances embedded therein through tax and transfer policy alone, is a fundamentally limited strategy. As those outcomes become increasingly unequal, as has been the case over the last three decades, such a strategy implies yearly increases in redistribution through the tax code and transfer system, something our political system will not support even once we return to functional politics. The uniquely influential role of money in American politics limits this strategy even further.
To punt on the primary distribution as a target of economic policy is to give up the match, to cede the field to those in the top few percent for whom the current structure of economic incentives and rewards is working just fine, thank you.
Conversely, to take aim at the primary distribution right now would start from the premise that left to its own devices, the market will most likely create jobs of quantity and quality inadequate to lift the living standards of many middle- and lower-income families. And I’m not just thinking of the unemployed and underemployed here. A key factor behind the E.P.I. wage findings is the absence of full employment: the benefits of growth flow away from those with the least bargaining power. Slack labor markets rob working families of a reliable source of more equitable distribution (this observation is particularly germane in our largely deunionized workplaces).
Which policies would promote full employment? In the near term, there would be more fiscal stimulus (instead of the fiscal drag we’re getting), and the Federal Reserve would not be planning to unwind its monetary stimulus too soon.  But in terms of aiming at the primary distribution, we need to be willing to think of the government as the employer of last resort, ready to step up direct hiring or subsidized employment programs in slack times.
Much the way the Fed becomes the lender of last resort when credit markets freeze, there is a role for the government to become the employer of last resort when the market persistently fails to create enough jobs.
I’ll have a lot more to say about this and similarly bold interventions in weeks to come, but the broader point is this: it is, of course, essential to preserve and protect the safety net and other measures that help offset the inequities of the primary distribution, but it is not enough. In fact, if, in times of rising inequality, we abandon the primary distribution as a target of economic policy, we place far too much stress on our safety net programs.
Progressive economic policy must aim to improve the primary distribution, and the pursuit of full employment labor markets is a great place to start.
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