What to do about low wages & decelerating job creation in the US? (Lane Kenworthy)

Lane Kenworthy has an excellent piece in the Christian Science Monitor which he describes (elsewhere) as a "condensed version" of his current thinking on the subject. The way he sets up the problem is very nice, and worth quoting in full:

The Great Recession and its aftermath are at the forefront of Americans' concerns right now. But wages were in trouble long before the economic crisis hit in 2008. After rising steadily for a generation following World War II, the wages paid to Americans in the lower half of the earnings distribution have barely budged since the 1970s.

That isn't because the US economy has failed to grow. It's because growth of wages no longer tracks growth of the economy. [JW: In other words, if it was ever true that a rising tide necessarily and automatically lifted all boats, it's not true any more.] Economic growth and wage growth have become decoupled.

This is worrisome. Rising income, even more than the opportunity to go from rags to riches, is at the core of the American dream. And people who feel they are better off than before tend to be more generous, altruistic, and participatory. If wage stagnation continues, America risks heightened frustration, alienation, and selfishness.

Moreover, given that pay and incomes have been growing rapidly for those at the top, the country has experienced a sharp increase in polarization. At some point this could engender serious societal friction.

Actually, I would say that it already has, in various direct and indirect ways. But so far the widespread feelings of anxiety, insecurity, frustration, and anger have largely been deflected away from the very rich and the factors promoting this economic polarization onto other targets.

Maxing out on two-income households

According to one view, though, household living standards have been improving without wage growth, and they can continue to do so.

It's true that incomes in households with two adults have risen in spite of stagnant wages. But that's due largely to the steady increase in second earners. America is approaching the end of its ability to use rising household employment as a substitute for rising wages. And in any case this isn't a solution for single adults.

It's also true that during the past few decades, Americans have benefited from improvements in product quality and the invention of new gadgets – new medical technology, personal computers, cellphones, the Internet, MP3 players, e-readers, and so on. These enhance quality of life. Maybe this trend will continue, but it doesn't seem wise to assume it will. Nor would that be enough. iPhones are great, but owning one won't help pay a mortgage or college tuition.

In the 1990s and 2000s, borrowing helped to substitute for rising wages and household incomes. With home values appreciating, middle-class families could take on more and more debt in order to fund rising consumption. But for many, that option is now foreclosed.

That last point should be underlined. The past several decades have been marked by dramatically increasing income inequality and stagnating wages for most of the population. It so happens that during the same period we have also seen exploding levels of individual and family debt. Pure coincidence? Unlikely. But the historical link between these different tendencies seems to be insufficiently appreciated.

A second view holds that wage stagnation actually is healthy, because low wages spur job creation. This seems plausible in the abstract; low wages should make it more attractive for employers to hire. Is it true in practice?

If it's correct, the lack of wage growth over the past three decades should have resulted in increasingly strong job growth. But that hasn't happened. The rate of employment growth has slowed in each successive business cycle from the 1980s to the 1990s to the 2000s. Job growth was especially lackluster during the 2000-07 business cycle; the country's employment rate did not increase at all.

Wage growth unlikely to return

A third approach is to hope that wage growth will return. Alas, I suspect that's unlikely. [....]

For the rest of that argument, along with some proposed solutions, see here. I'm not sure I am totally convinced, since I suspect (and hope) that the potential range of realistically viable solutions may be wider than Lane suggests. (More on that another time, perhaps.) But his analysis in this piece is, as usual, well informed, well argued, illuminating, and usefully thought-provoking ... and it's compact, too. So you ought to read it.

—Jeff Weintraub