What to Do about Wages?

By Kevin D. Williamson

Monday, September 01, 2014

It’s a story of medians and means: As the left-leaning Economic Policy Institute runs the numbers, the average U.S. household income grew by 53.4 percent in inflation-adjusted terms between 1979 and 2007. That’s the mean. But the median is in an entirely different place, with the strange fact being that 90 percent of households’ incomes grew at less than that average rate. The incomes for the lowest-earning fifth grew by 29.2 percent in real terms, those of the middle fifth by 19.7 percent. Even top-10-percenter incomes near, but not quite at, the very top grew at a below-the-average pace. The reason the average overall wage growth was so much higher than the growth realized by nine out of ten households is that incomes at the very top of the distribution — the reviled top 1 percent — grew very strongly, 244.7 percent between the last days of Jimmy Carter and the waning of the George W. Bush years.

As always, it is necessary to emphasize that these bracket averages tell us practically nothing about what happened to the incomes of actual households, because households move through the brackets over the years, and the bottom fifth of 1979 was not composed of the same households as was the bottom fifth of 2007 — same goes for the top 1 percent. For example, using IRS data to track actual households rather than bracket averages, we find that of those who were in the poorest fifth in 1979, 85.8 percent had moved to a higher bracket by 1988; almost 15 percent of them had moved to the top income bracket — which is a higher percentage than remained in the poorest bracket, a fact that might be considered the finest achievement of the Reagan-era economy.

Household incomes’ rising by 29.2 percent at the bottom and by 19.7 percent in the middle — again, in inflation-adjusted terms — over the course of a few decades is nothing to turn one’s nose up at: Real standards of living increased by approximately zilch for 99.85 percent of human history before the Industrial Revolution changed everything. Americans’ attitudes toward the economy hover somewhere between optimistic and entitled, but there is no fundamental reason to assume that real standards of living will improve year after year, as though a natural law required it. The world is only what we make of it.

Still, rising household incomes is to be celebrated. But the news is not all sunshine and prosperity. A great deal of those gains in household incomes has come from having more workers per household, notably from the increasing participation of women in the full-time work force, and from more hours of work per household. Neither of those is a bad thing in and of itself: The typical American worker is not a pick-wielding coal miner out of The Molly Maguires, and more workers doing more work is generally a good thing. (Coal mining is still a pretty tough way to make a living, but, if the industry’s numbers are to be believed, it pays on average $82,000 a year, just a hair shy of a top-10-percent household income.) The upshot of this is that while annual household incomes are up, individual hourly wages have stagnated in many cases and fallen in others — for men, real hourly wages have declined slightly since the 1970s.

The liberal-leaning EPI’s findings are about the same as those of various conservative scholars and by-the-numbers academics. But its explanation of the data borders on the superstitious. If you would like a condensation of everything that is odd and wrong about the Left’s view of how the economy works, consider this argument from EPI’s report: “If inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.” That is, it should be obviously, exactly backward: If middle-class incomes had been nearly $18,000 higher in 2007, then inequality would not have risen.

The Left sees inequality as a cause of economic facts, not an effect of them. As EPI sees things, inequality is an independent actor, a motive force in world affairs: It is not only a “determinant” of economic conditions but “by far the most important determinant”; it has, under its own steam, “blocked living standards growth for the vast majority”; and it is “the key driver behind stagnant wages for workers at the bottom.” This is a deeply weird view of how the world actually works: The Left thinks that inequality is not a mere measure of relative incomes or wealth but something that does things in the world, something that acts — and not only acts but acts decisively, determining Americans’ economic prospects. This sort of flatly preposterous analysis is the unfortunate effect of mistaking the map for the territory and the model for the thing modeled, the kind of magical thinking that causes people to believe that Superman could turn back time by reversing the rotation of the Earth.

That leads to the sort of silly writing exemplified above, but it also leads to bad policy ideas. EPI is about as respectable an economic-policy outfit as the Left has to offer, but its preferred policy responses to wage stagnation are basically primitive: raising minimum wages, as though long-term prosperity could be brought about by congressional fiat; passing paid-sick-leave laws; and changing corporate governance and financial regulation in ways that would impede or discourage income growth among corporate managers and financial professionals, who along with the occasional professional athlete and movie star make up the top 1 percent. There is more magical thinking in that, too: There is no big bucket of “national income,” and $100,000 in forgone pay for a CEO or private-equity investors does not mean that there is an extra $100,000 sitting around available to be used as income for somebody else. We talk about the “distribution” of income, but that is a purely statistical idea. There is no distributor of income, and income cannot simply be moved from one pocket to another like wampum.

Similar magical thinking infects the Left’s ideas about unions. Unions are in decline practically everywhere in the private sector, in no small part because the thuggish, corrupt, rapacious leadership of U.S. industrial unions helped to diminish or outright destroy the industries they once were associated with. Unions live on mainly in government work. But that is good enough for EPI to conclude that a renaissance of unionization is desirable: “This policy choice is clear when one looks at the evidence. . . . Unionization has held up much better in the public sector, where employers have less ability to fight organizing drives.” What else might distinguish public-sector employers from, say, General Motors? The main thing is a complete lack of competitors and, most important, the ability to command revenue from the public at gunpoint via taxation. This is not true of, say, McDonald’s.

None of this would be that important if EPI’s Heidi Shierholz had not just been named chief economist of the U.S. Department of Labor. A think tank can offer crackpot policy recommendations; a high-ranking Labor official can help implement them.

What should be done?

Inequality as such should be a complete non-issue. It is utterly meaningless as a measure of anybody’s real-world standard of living or of national prosperity. If real wages for the bottom half of households were growing at an average of 1 percent a year and those for the top half were growing at an average of 1.5 percent a year, we’d have a situation in which everybody’s standard of living was improving at a very good clip even though the pay gap between the highest-paid jobs and the lowest-paid jobs was poised to get much larger over time. That’s exactly the kind of problem you want to have.

The Left talks about “inequality” rather than about bringing up real wages for low- to middle-income households because the Left — like the Right — does not really have a plausible policy agenda for raising those incomes. Inequality rhetoric is simply an exercise in sleight-of-hand, turning a conversation about poverty and low or stagnant wages into a conversation about what is going on with the incomes of hedge-fund managers and Fortune 500 CEOs. Doing something to their income is pretty straightforward: You implement confiscatory taxes. They’ll retaliate in various ways — sometimes you move the corporation to Switzerland, sometimes you move yourself to Singapore. But you could, if you were serious about it, significantly reduce incomes for U.S. corporate managers, investors, and financial operators. You might even decrease measured inequality in doing so.

And all that would do squat to raise incomes — not government benefits, but incomes – in the middle and at the bottom.

The fact is, we do not really know what to do. Politicians and think-tankers are forever in the position of loudly declaiming the need to do something, but what? The fundamental challenge is that global markets are growing ever-more-closely integrated. For some workers, that means much larger returns on skills and entrepreneurial success: Success in a $100 billion global market pays better than success in a $10 billion national market. For other workers, that means pressure on wages as they are brought into more direct competition with workers overseas. This often is understood as being driven by low wages abroad, but that is only part of the story. It is not low wages that makes Germany a manufacturing and exporting powerhouse. There are dozens of other factors at play, from work-force composition to the local investment climate to proximity to growing markets powered by an emerging global middle class. None of that is going to be very responsive to some blunt, simple change like tacking a few bucks on to the minimum wage.

There are basically three ways to raise incomes.

The first is through capital investment that raises the value of labor. But capital investment also replaces labor in many instances, and it is just as effective at raising the value of labor in overseas markets. And EPI’s analysts are correct to point out that in the United States wage growth has lagged behind productivity growth, suggesting that deeper investment may not be enough to really move Americans’ wages forward.

The second way to raise the value of labor is through education and the cultivation of skills. Here, EPI’s analysis seems to me grievously mistaken, emphasizing, as it does, that a four-year college degree has relatively little effect on many workers’ prospects: “The gap between wages near the top of the wage distribution and the middle (and, for that matter, between the very top and the top) has grown much faster since 1995 than has the wage gap between those with a four-year college degree and those with a high school degree. This suggests that rising demands for this credential cannot fully explain the growth in inequality.” What it really suggests is that a four-year degree is not a credential at all, and that markets are much better at sorting than are college-admissions committees and the teaching assistants who are entrusted with the grading. After a generation of complete and utter domination of the higher-education system by the Left, many four-year degrees are nearly meaningless, as are many advanced degrees. The evidence suggests that return on in-demand skills in fields such as technology and finance is very high.

The third way to increase the value of labor gets us right back where we started: bigger markets. Workers in fields that have benefited from more efficient international trade have thrived in many cases — but many have not. The so-called race to the bottom in wages is largely a myth — Audi is not going to move from Ingolstadt to Port-au-Prince — but globalization puts pressure on many U.S. workers’ wages, inevitably.

The problem facing conservatives, at least politically, is that the Left’s empty promises about the effects of minimum-wage hikes and the like strike many workers as more plausible than our story about tax and regulatory reform. And the real outcomes of the policies preferred by conservatives are uncertain, too. There are things we can and should do: Don’t have the developed world’s highest corporate income tax rate and its only non-territorial tax system. Don’t have a cumbrous and unpredictable regulatory apparatus that imposes more in compliance costs than U.S. firms pay in business taxes. Don’t entrust the education system to a self-serving cartel of bureaucrats that doesn’t get the job done. Don’t treat people who might be very prosperous welders and mechanics like losers because they don’t have an MFA from Third-Rate State. Don’t traffic in the superstition that wages at the bottom would somehow magically improve if wages at the top didn’t. Don’t structure your social-welfare system in a way that discourages work and eventual self-sufficiency.

And, above all, let’s disabuse ourselves of the uncharitable notion that Americans are lazy. I often think of that scene in Jurassic Park when the tyrannosaur is being lured out with a staked goat. “T. Rex doesn’t want to be fed,” the paleontologist says, “he wants to hunt.” I do not think that most Americans want to be coddled by the state and treated like livestock by its bureaucrats. They want to compete. But it is a tougher market than it was a generation ago. There are things that can be done to help, but those things are by their nature general and incremental.

Predictable, stable, prudent, thrifty governance is not the stuff out of which exciting moral crusades are made. But it is probably the best we can do.