Low Unemployment Doesn't Increase Wages Like It Used To

AP Photo/John Minchillo

Globalization, Contingent Employment, Non-Compete Clauses, and Now This: A robot works alongside a human, Virginia Beach, 2017. 

This article appears in the Fall 2017 issue of The American Prospect magazine. Subscribe here

On the first Friday of every month, the Labor Department releases the latest numbers on employment and wages. Here’s a sampling of recent headlines from the mornings after, which have remained remarkably unchanged month after month: “The Job Market Is Strong, but Wages for Americans Have Barely Rebounded” (The Washington Post, May), “Jobs Aplenty, but Wages Stagnate” (The Wall Street Journal, June), “Payrolls Expand, Even as Pay Lags” (The New York Times, July), “US Jobs Growth Rebounds but Wages Disappoint” (Financial Times, July).

Those “buts” (and the one “even as”) are a shorthand expression of both common sense and the consensus among virtually every school of economic thought: In a market economy, as unemployment falls and unoccupied workers grow scarce, workers should be able to bid up their wage rates. Under conditions of full employment, generally considered to be around 4.5 percent, wages should rise.

And yet, they don’t. Today’s wage increases, which have averaged a little above 2 percent a year throughout the current prolonged recovery, barely keep track with increases in the cost of living, and are roughly half of wage increases in previous recoveries.

To be sure, new census data show that household incomes are rising now, having finally surpassed their pre-recession peak in 2007, which itself only matched the pre-recession peak of 2000. (See: Sisyphus, Myth of.) This gap between rising incomes and stagnating wages, however, isn’t all that mysterious: Household income can increase when workers get more hours of work, and that seems to be exactly what’s happened. According to the census data, Americans already working full-time, whose hours didn’t increase, didn’t see any growth in income. That would have required higher wages.

Therein lies a key distinction. Adding to a worker’s hours is commonly the prerogative of management. Winning a pay increase, on the other hand, usually involves, and often requires, some initiative from the workers themselves, which in turn requires some bargaining power. No worker initiative, no bargaining power, no raise.

The factors that diminish worker power, even as low unemployment augments it, have been amply documented. Indeed, the very thought that the Federal Reserve may still consider a low unemployment rate to be decisive evidence of looming inflation should instill doubt that the Fed understands the actual 21st-century economy. In that economy, here are some of the factors that, low unemployment notwithstanding, undercut workers’ bargaining power:

Globalization. In 2006, economist Alan Blinder, a former Fed vice chair, estimated that the number of service-sector jobs that could be offshored was two to three times the number of workers then employed in manufacturing. Adding up all those offshorable positions, both in services and manufacturing, produced a grim total of between 42 million and 56 million vulnerable jobs (a number that surely has grown in the ensuing 11 years). That didn’t mean, Blinder hastened to explain, that anything near those numbers would actually be offshored, but it did mean that the wages of those millions of workers would likely be constrained by the threat of offshoring or by low-wage offshore competition. Confirming Blinder’s presentiments, this June the Bank for International Settlements reported that 10 percent of the decline in U.S. labor costs between 2006 and 2016 was the result of the lower costs of labor abroad. Between 1995 and 2005—during the first six years of which we had yet to open our doors to Chinese manufacturing—the low cost of labor abroad accounted for just 2 percent of lower domestic labor costs.

The Rise of Non-Standard Employment. Over the past couple of decades, the number of Americans employed on a contingent basis—through staffing or temporary employment agencies (whether their work is temporary or not), in the gig economy, as independent contractors (whether they’re genuinely independent or not), or by subcontractors or sub-subcontractors—has increased significantly. Economists Lawrence Katz and Alan Krueger have calculated that the share of such workers in the overall workforce rose from 10.1 percent in 2005 to 15.8 percent in 2015—and that of the net increase in 9.1 million jobs, the number of contingent jobs rose by 9.4 million, while the number of standard jobs actually declined by more than 300,000. Workers in the contingent economy are generally paid at lower rates than their “standard” counterparts, don’t receive benefits, and can’t bargain with their actual employers for raises. Indeed, they’re not covered under the National Labor Relations Act.

The Rise of Non-Compete Agreements. These agreements, which employees sign as a condition of going to work for their employer, were initially confined to professionals with knowledge of their employer’s proprietary technology. In the absence of any organized employee opposition to such agreements, however (itself a byproduct of the absence of organized employees, i.e., unions), they have spread to encompass 18 percent of the entire U.S. workforce—roughly 30 million workers—according to a Treasury Department report from last year. One could wish that the American economy were so innovative that there really were 30 million workers with knowledge of crucial technological breakthroughs, but that’s sadly not the case. Instead, such agreements have spread to fast-food franchises and throughout the retail and service sectors, where they serve to deter workers from moving to a rival enterprise for higher pay.

The Rise of the Robots. To date, there are no hard estimates of jobs lost to the new wave of automated technology (nor the number of jobs that it has created), much less the number of workers who’ve had their wages held in check by that rise. Absent credible numbers, though, a long-term threat to wages looms on the horizon. And even when workers’ incomes rise as a consequence of an increase in productivity due to new technology and new skills, the accompanying reduction in the size of the workforce can more than offset the raises of those who remain on the job. The unionized longshoremen who operate the cranes at America’s ports may be the highest-paid blue-collar workers in the country, but today’s workforce comes to a bare 10 percent of the number of workers who loaded and unloaded ships before containerization.

To arrive at the total number of workers who face these structural impediments to wage increases, we can’t just add the workers whose ability to win raises is inhibited by globalization to those hampered by non-standard work arrangements and those handicapped by non-compete clauses. For one thing, some of these workers—we don’t know how many—fall into more than one of these categories and face more than one of these obstacles. Even allowing for this overlap, however, a plausible minimum estimate of the number of workers whose pay is held in check by at least one of these factors would likely be close to 65 million. And that’s not counting:

De-Unionization. The preceding structural factors don’t even take into account the most explicit source of decline in worker power: de-unionization. With the share of unionized private-sector workers down to a blink-and-you-miss-it 6.4 percent, collective bargaining—the only kind of bargaining that most American workers could ever enter into—trembles on the brink of extinction.

No raises? Well, employers don’t bargain with their workers anymore. Even when those workers aren’t contingent and don’t suffer from non-compete clauses or the lower wages in China, in the vast majority of American workplaces there’s no process by which non-union workers can bargain for a raise. Conversely, even in unionized workplaces, the specter of China or temps or robots may loom over the bargaining table.

It’s not that corporate CEOs have forsaken bargaining altogether. Virtually all of them have been in perpetual tacit bargaining with their shareholders since the 1980s, when the doctrine of maximizing shareholder value began to take hold, at the same time, not coincidentally, that employers’ war on unions intensified. In the 1990s, as more and more CEO pay was granted in the form of stock options, CEOs also began bargaining with themselves: Buying back shares and issuing higher dividends and a range of other shareholder benefits worked to benefit those selfsame CEOs as well. Nice work if you could get it.

But the CEOs’ bargaining has become increasingly adversarial in this century, as “activist investors” have come forward, purchasing some small percentage of a company’s stock, demanding ever-higher payouts to shareholders, winning institutional investor allies in their quest, and using that clout to threaten CEOs with the prospect of being ousted if they didn’t comply. The activists have been able to back up their threats. This July, The Wall Street Journal reported that the CEOs of major corporations were being toppled by investor pressure at a record rate, twice that of last year.

The economic consequences of American capitalism’s shareholder-über-alles ethos have clearly taken a toll on wages. University of Chicago Booth Business School economist Simcha Barkai has calculated that over the past 30 years, the share of revenues in U.S. nonfinancial corporations going to profits has risen by 13.5 percent, while the share going to labor has declined by 6.7 percent and the share going to investment (in research, expansion, new or improved facilities, and the like) has also declined by 7.2 percent.

Getting American wages to rise, then, will take more than just reducing unemployment, or even moving close to a full-employment economy, important and necessary though that may be. It will require reversing the spread of non-compete clauses (several states have already banned them save in exceptional circumstances). It will take trade policies that counter the mercantilism of lower-wage nations. It will require tax reform that raises the rates on capital income to at least the level of taxes on labor income, and raises the top rates much closer to the levels that prevailed in the 1940s and 1950s—levels so high that millionaires were effectively blocked from becoming billionaires. It will take a wholesale rewriting of labor law so that it applies to workers in all manner of employment arrangements, that gives those workers the power to bargain for all the workers in entire sectors of the economy, and that provides some kind of tangible governmental incentive for workers to join unions.

In sum, it will require the Democrats to morph into something they’ve never been: a labor party. That doesn’t mean abandoning any of their emphasis on racial and gender equity. It does mean that at a time when the normal workings of American capitalism have become largely inimical to the interests of the vast majority of the American people, Democrats need to consciously craft a massive redistribution of power and wealth from capital to labor. Such a transformation, of course, would require a complete reformation of the American way of financing campaigns. Bernie Sanders’s 2016 presidential campaign demonstrates that an anti–Wall Street politics can generate substantial anti–Wall Street funding.

Radical though such a transformation may be, it’s also required if we are to realize such distinctly non-utopian goals as restarting the upward march of wages. For the key to boosting worker income has always been, and remains, boosting worker power. Regenerating the American middle class absent greatly enhanced worker power is simply magical thinking.

And there’s no “buts” about it.

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