The rate of U.S. productivity growth has been surprisingly stable since the late 1940s. Yet for the vast majority of workers, the benefits of increased productivity are slipping away. (More)

Squeezed, Part I: Slipping Away

This week Morning Feature explores the causes and consequences as working Americans are increasingly squeezed by stagnant wages and rising costs of living. Today we see how workers have largely stopped sharing the benefits of increased productivity. Tomorrow we’ll explore the social and political consequences if working Americans continue to be squeezed out. Saturday we’ll conclude with some social and policy solutions to relieve the squeeze on workers.

A 40-year Recession

The Great Recession has hurt most working families. Yet measured in productivity growth, it’s almost invisible … a flattened blip at the tip of the red line in this graph:

Indeed as the dark blue line on that graph shows, the Great Recession for factory, clerical, retail, and service workers began in the mid 1970s. That is when, in the apt metaphor of the National Journal‘s Jonathan Rauch, the economic gears began to slip for America’s workers:

But first, let’s consider a nexus of troubling economic trends that seem to be driving and deepening many of the specific problems—and may prove to be the most intractable problem of all. If economic strength means anything, it is that the economy can make almost everyone better off, thereby strengthening the country’s social fabric as well as its balance sheet. Such an economy unites rather than divides us.

Today’s economy, by that standard, is struggling. Its ability to deliver rising living standards across the income spectrum is in decline, and perhaps also in question. “This is a fundamental problem,” says Robert J. Shapiro, the chairman of Sonecom, an economic consultancy in Washington. “This is America’s largest economic challenge. People can no longer depend on rising wages and salaries when the economy expands.”

Look at that graph again. Notice how the lines run side-by-side from the late 1940s to the mid 1970s. Workers’ compensation kept pace with rising productivity. As the economy grew, working families shared the benefits. Now look at the red line of productivity. The economy has continued to grow, with surprisingly few and small wiggles, at about the same rate since the late 1940s.

Yet by the mid-70s, most workers were no longer sharing in that economic growth.

Four Slippages

That decoupling of productivity and wages is the first of four slippages in our economic gearbox. The second is the increasing disconnect between the richest 1% and the rest of American workers. Incomes for that 1% have more than doubled since 1979. Incomes for the next 4% rose by only half, and for the next 5% even less. For the rest of us, incomes have barely risen at all:

Rauch cites two reasons for this second slippage: globalization, and business revenues shifting from physical production to information processing. Paul Krugman offers a third reason: jobs displaced by workplace automation.

Workers with college degrees fared somewhat better, although most of the current “college premium” owes to stagnant non-college wages rather than gains by college-educated workers. As for those without college degrees, Rauch writes, “the economy is telling less-educated men: Get lost. And they are doing just that.”

This third slippage, dropping out of the workforce, tears at the social contract. A growing economy offers few benefits for the unemployed. Worse, the longer a working age adult has been unemployed, the more skeptical potential employers become and the more difficult it is to find a job. Finally, as Rauch notes, a job is not just a source of income but a key element of social identity and self-esteem, especially for men.

The result is slippage number four – for men, marriage is increasingly a privilege of wealth:

In 1970, more than 75% of men were married, regardless of income. Today, nearly half of low-income men are single and – because employers are more likely to hire and promote married men – that problem is cyclical. As Rauch writes:

Family structure, in short, has become both a leading cause and a primary casualty of an emerging class divide. At the top are families with two married earners, two college degrees, and kids who never question that their future includes a college degree and a good job; at the bottom, families with one (female) earner, no college, no marriage, and kids who grow up isolated from the world of work and higher education. And the two worlds are drifting apart.

About That Long-Term Debt….

This decoupling of most American workers from the benefits of a growing economy also fuels our long-term debt outlook. As Dean Baker of the Center for Economic and Policy Research writes, the aging of the Baby Boomers need not be the demographic time bomb that simplistic pundits insist:

Fans of arithmetic might note that the ratio of workers to retirees fell from 5 to 1 in the early sixties to 3 to 1 in the early 90s. This sharp drop in the ratio of workers to retirees did not prevent both workers and retirees from enjoying substantial improvements in living standards over this period. The reason is that productivity growth, what each workers produces in an hour of work, swamped the impact of a falling ratio of workers to retirees.

That will also be the case as the ratio of workers to retirees falls from the current 3 to 1 to a bit under 2 to 1 over the next 23 years under any plausible assumption about productivity growth. The chart below compares the impact of the decline in the ratio of workers to retirees in reducing the living standards with the impact of productivity growth in raising living standards, assuming that the average retiree consumes 85 percent as much as the average worker.

But Dr. Baker’s thesis only holds if the benefits of rising productivity are distributed broadly throughout society. As Rauch shows, most of those benefits have been gone only to the very richest … and that disconnect leaves workers competing with retirees for the scraps that remain.

As we’ll see tomorrow, the decoupling of productivity and wages poses real social and political problems that threaten both the Democratic Party and democracy itself.


Happy Thursday!