Real Wages Falling Despite Productivity Gains

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One of the elements of the American Dream is that each generation will enjoy a better standard of living than its predecessors. As this article, “Not Your Father’s Pay: Why Wages Today Are Weaker” in the Wall Street Journal makes clear, that is no longer true:

American men in their 30s today are worse off than their fathers’ generation, a reversal from just a decade ago, when sons generally were better off than their fathers, a new study finds.

The study, the first in a series on economic mobility undertaken by several prominent think tanks, also says the typical American family’s income has lagged far behind productivity growth since 2000, a departure from most of the post-World War II period.

The findings suggest “the up escalator that has historically ensured that each generation would do better than the last may not be working very well,” says the study, which is scheduled for release today. The study was written principally by John Morton of the Pew Charitable Trusts, which is leading the series, called the Economic Mobility Project, and Isabel Sawhill of the Brookings Institution. Other participating think tanks are the Heritage Foundation, American Enterprise Institute and the Urban Institute.

In 2004, the median income for a man in his 30s, a good predictor of his lifetime earnings, was $35,010, the study says, 12% less than for men in their 30s in 1974 — their fathers’ generation — adjusted for inflation. A decade ago, median income for men in their 30s was $32,901, 5% higher than 30 years earlier. Ms. Sawhill said she isn’t sure why men’s wages have stagnated. “It seems there’s been some slowdown in economic growth, it’s possible that the movement of women into the labor force has affected male earnings, and it’s possible that men are not working as hard as they used to.”

The study suggests that absolute mobility — the rate at which an entire generation’s lot improves relative to previous generations — has declined. But within a particular generation, individuals can still get ahead if relative mobility, the rate at which the rich and poor trade places, remains high. Poor fathers may have rich sons, and vice versa.

The report also found that between 1947 and 1974, productivity, or output per hour, and median family income, adjusted for inflation, both roughly doubled. Between 1974 and 2000, productivity rose 56% while income rose 29%. Between 2000 and 2005, productivity rose 16% while median income fell 2%, challenging “the notion that a rising tide will lift all boats,” the report says.

Ms. Sawhill said several factors could explain the divergence: a growing share of income going to the highest-paid workers, or to profits; an increased share of labor compensation going toward benefits such as health care; or a decline in the number of wage earners in the typical family.

This is a serious matter, particularly in America. This is a country of many subcultures: geographic, ethnic, religious, socioeconomic. And these cultures have become less well integrated over the last 40 years. One of the things that has helped glue this diverse and potentially divergent society together is a belief in opportunity, that hard work will be rewarded, and the fact that the economic pie has been growing (even if you aren’t necessarily getting your fair share, getting more than you had before isn’t a bad consolation prize).

The fact that real wages are falling for men in their prime earning years, combined with increasing income disparity, will lead to growing efforts to change the rules of the game to produce better outcomes. We can see it already in the new protectionist sentiment in Congress, particularly the interest in having China revalue the yuan. I hate to be cynical, but the reason for the focus on our trading partners is that it is easier to ally against foreign threats, real or not, than to reach agreement on what to do with domestic institutions and practices.

US multinationals should watch these developments with concern. They are almost certain to be one of the next targets (they are already viewed with some suspicion in the public’s mind). One would think Corporate America would recognize the danger of rising populist sentiment and take more of a noblesse oblige posture to forestall it. But thanks to Reagan and Thatcher, we’ve had over a generation of pro-market, pro-business policies, and corporate executives seem unable to recognize that sentiment can change relatively quickly. The freewheeling 1920s were followed by the New Deal, and the 1950s by the 1960s.

The handwriting on the wall is that things will get worse for the average Joe, and quickly. The Financial Times on Thursday had a series of articles on food price message. The bottom line: food prices are rising sharply, for secular rather than cyclical reasons, and the trend seems likely to endure. From “Consumers set to feel the bite as fears grow over food price inflation“:

Retail food prices are heading for their biggest annual increase in as much as 30 years, raising fears that the world faces an unprecedented period of food priceinflation.

Prices have soared as the expanding biofuels industry, climate change and the growing prosperity of nations such as India and China push up the costs of farm commodities including wheat, corn, milk and oils.

Food companies have started passing on these increases to consumers but the prospect of sustained commodity price rises means the industry’s profits could be hit as it is forced to absorb the higher costs itself….

John Parker, food analyst at Deutsche Bank, said: “There is growing concern within the food industry that the present upswing in soft commodity prices is structural rather than cyclical.”

Few countries have not felt the impact of food price rises. In the US, prices have risen by 6.7 per cent, seasonally adjusted, since the beginning of this year, compared to 2.1 per cent for all of 2006, according to the Bureau of Labor Statistics.

If prices keep rising at these levels for the rest of the year, it would be the biggest annual increase since 1980.

The UK’s consumer price index showed annual food price inflation of 6 per cent in April – its highest level in almost six years, and well ahead of overall inflation of 2.8 per cent. Food price inflation is lower in the eurozone at 2.5 per cent but still rising more quickly than overall prices.

In China, food costs are increasing more than twice as quickly as other kinds of prices, up 7.1 per cent last month compared to a year earlier. And in India, annual food price inflation has reached its highest levels since the late 1990s, climbing above 10 per cent year-on-year.

US research firm Bernstein estimates that its Food Commodities index, which tracks a dozen agricultural raw materials including wheat, barley, cocoa and edible oils, will show cost inflation of 21 per cent this year – the biggest rise since the index started almost a decade ago.

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One comment

  1. unlawflcombatnt

    The increase in food prices will reduce the amount of money consumers have to spend on non-food items, such as cars, computers, TVs, etc. By reducing the amount of money consumers have to spend on such “core” items, it will reduce the calculated “core” inflation number. Little wonder that this is never mentioned in the Corporate-controlled media. It would force them to stop using the “core” inflation number as a gold standard. Non-core inflation reduces the measurement of “core” inflation. And, as pointed out by Peter Schiff, the “core” inflation number was intended to smooth out short-term fluctuations in the price of non-core items (food and energy). The key here is the phrase “short-term.” Year-over-year there is no reason whatsoever to use “core” inflation, because the short-term fluctuations should have evened out. Schiff’s point is that “core” inflation is meaningless on a long-term basis. It’s the total CPI that counts, not the “core.”

    Economic Populist Forum

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