Labor Day and the “Lost Decade” for Wage Growth

Today’s worsening income inequality is partly explained by stagnant middle class wages during the last decade. Why AREN’T wages rising?

Productivity and Workers’ Pay

Up until about the mid-1970s, greater U.S. worker productivity translated into higher wages. But since then, there’s been a disconnect. Wages have lagged far behind increases in productivity.

That’s especially true during the last 10 years. The U.S. worker has become about 25% more productive during this period but real wages have virtually not changed.

Why has worker pay no longer increased in tandem with increased worker productivity? Today, in honor of Labor Day, and then also in the next few blog posts, we’ll look at some of the most important reasons for this disconnect.

The world is a complicated place, and anybody who says there’s an easy answer is being simplistic. But by looking at some of the likely reasons why this is now going on, this problem can start making sense.

Globalization

American workers are competing more and more with workers from the rest of the world. In earlier decades this primarily affected blue-collar occupations and those not requiring a college education. But more and more it is also affecting white-collar and college-required occupations as well.

When you think about jobs and the negative effects of globalization the first thing that likely comes to mind are auto factories in Mexico and call centers in India—the international outsourcing of manufacturing and services. But there is much more to it than this.

The increased internationalization of business affects our wages in many ways. Here are seven worth thinking about.

1. Trade Imbalance

The U.S. has been running an annual trade deficit every year since 1976. That means we have been paying more for what we import than what we are getting paid for what we export. But that imbalance has gotten a lot worse in the last 15 years or so. After trade surpluses through the 1960s, the highest trade deficit before 1998 was about $150 billion in the mid-1980s. But every year from 2000 through 2013 there has been a trade deficit of between about $350 and $750 billion each year.

These large and ongoing trade deficits mean that jobs lost to imports have far outpaced the jobs gained from exports. Increases in imports of manufactured goods reduce the number of relatively high-paying manufacturing jobs in the U.S., resulting in those workers being forced to take lower paying jobs. Also, in many other industries beyond manufacturing, there is downward pressure on wages because of competition with much lower paid workers in countries that have much lower living standards.   

2. Imports of Intermediate Manufactured Goods

Even for those products made in the U.S., manufacturing jobs have also been lost through the increasing practice by companies of buying major components of those products from low-wage countries.  These components tend to be the most labor-intensive part of producing the finished product, and so having those manufactured overseas has a big impact on the number of U.S. production workers.

3. Lower Prices for International Goods

Because low-wage countries have greater capacity to manufacture more sophisticated goods, those goods can be sold for less. Since U.S. worker pay is related to the price of what they make, lower international prices lead to lower U.S. wages. Although lower prices for goods help keep inflation in check, that savings for U.S. workers is modest compared to their reduction in income.

4. Threat of Foreign Competition

Simply said, fear that workers will lose their jobs to cheaper offshore labor results in those workers being willing to accept lower wages to avoid that. Given that  jobs are often indeed moved to other countries, workers understandably are under great pressure to accept concessions in order to keep their employment.

5. Companies’ Foreign Investment

When U.S. companies invest in manufacturing and other facilities overseas, that means less investment in the U.S. production and servicing base. Not only does that reduce U.S. jobs, it creates greater international competition for those still-surviving manufacturers and servicers.

6. The Ripple Effect

Workers driven out of manufacturing and other industries lost to foreign competition not only tend to find work in occupations with lower wages, but they are now competing with others in those occupations. That lowers the wages in those other occupations.

This affects not only those workers personally displaced by foreign competition, but also the new generation of low-skilled workers who would have gone into the now-lost industries.

Globalization effects not only those who lost work or could not enter the workforce because of direct global competition, but also all workers with similar skills and potential whose wages are dragged down because of the increased competition within the U.S.

7. Offshoring of Services

Beyond call centers in India and the Philippines, more and more white-collar and even professional services are being transferred offshore. Computer programming, doctor support services, research and development, and a wide range of similar departments and services are being moved by U.S.-based companies to low-wage countries. Or those companies are contracting for those services with quickly emerging businesses providing such services in those countries.

Again, this offshore competition not only directly displaces those white-collar and professional workers within the U.S., it holds down the income of those who work in those positions here.

Next…

Besides globalization, U.S. wages have been kept down by other major factors including high unemployment, increasing employer health care costs, the shift to lower paying jobs, the decline in union jobs, a declining minimum wage, and increased executive and finance sector pay. We’ll write more about these in our next blog post in a few days.

NOTE: Much of the above is from The State of Working America, 12^th Edition, from the Economic Policy Institute. This is a nonpartisan, nonprofit organization “created in 1986 to broaden the discussion about economic policy to include the interests of low- and middle-income workers.”