Economists say they are stumped by a mystery: Since the US economy is doing so well, and unemployment is down to below 4%, which many argue is close to “full employment” in historic US terms, why is it that wages are not growing, and in fact, are lower in real dollars than they were in 1974, almost half a century ago.
Reading articles like these in news reports ranging from NPR to the New York Times to the Economist magazine in the UK, is a good source for some laughs.
These poor financial journalists and the economists they quote as their sources are all struggling because their models, and everything they learned in school about market theory, says that if labor markets are “tight,” meaning that there are few jobs available to unemployed workers, it should drive up wages of those who have jobs, because employers would have a hard time replacing workers who ask for more money.
Perhaps in some magic world where workers and bosses were operating basically as equals in some mystical “free marketplace,” that might be true, but it ignores things like power relations and labor law, the pernicious role of the new digital age where a worker’s employment record is immediately available for inspection by any potential new employer, and of course the existence of an asymmetric “global” economy which allows for the virtually free flow across borders of goods and especially investment capital, but that tightly restricts the flow of labor (that is, workers cannot just up and move to another country where pay and working conditions are better).
Add to that the reality that statistics upon which economists base their views are developed and reported by a government that is almost totally in the pocket of the bosses. So when, for example, the Bureau of Labor Statistics says that unemployment is down to just 3.9 percent, that agency is using a definition of unemployment which has been changed multiple times over the years, always in a direction of reducing that number from what it would have been under an earlier definition. Basically the BLS defines the unemployment rate as the number of people who want a job and cannot find one (that’s the numerator), divided by the number of people who are “in the labor force” (the denominator). But the BLS today restricts its definition of “in the labor force” to meaning just those who either have a job, or who may not have a job but looked for one at least once during the prior four weeks. Being employed meanwhile, is currently defined broadly as anyone who has worked as little as one hour during the week prior to the survey! One hour!
No wonder unemployment in the US is reported as being so low these days.
The guy who came wandering down the road looking for work, saw you pulling weeds out of your yard along the edge of the street and who asked if he could be hired to help, and whom you then paid $10 to assist you with an hour’s worth of weeding assistance, would be classified as part of the labor force under this definition, but the struggling mother who, unable to find a job to support her two kids, enrolled in a community college half-time to qualify for childcare and foodstamp benefits, would not be classified as “in the labor force.” Neither would a convicted felon who had done his jail time on conviction for stealing a car to sell to a crooked “chop shop” for parts, who can no longer be hired now because of his criminal record, be considered as “in the labor force.”
Meanwhile the adjunct professor with a master’s degree in English literature who struggles to get by teaching two freshman English classes a semester at the local community college for $2000 per class is considered employed.
No wonder America is at “full employment”! We’ve got tens of millions of people classified as “working” who are actually under-employed and would like a full-time job but cannot find one — many of whom had such a job before 2008 and lost it to discover it would never come back —and millions more who have spent months or years trying to land a job and because they couldn’t move to a better job-hunting area for one reason or other (family needs, a court probation order, lack of experience living anywhere except where they were born and raised, a house they can’t sell, kids finishing high school, a join-custody agreement for children following a divorce, etc.), but because they’ve just given up trying to find work after discovering there are none, are not counted as being part of the labor force at all.
Then there’s another thing that economists don’t really consider, and that is how incredibly much weaker workers have become in their bargaining position with employers. Aa unions have been systematically weakened over the past few decades by both political parties — primarily Republicans, who have been on a jihad to destroy unions, but also Democrats who have ranged from lackluster to treacherous in their lack of support for labor unions and worker organizing rights, workers, both unionized and not unionized, have been losing ground economically.
Consider our last Democratic president, Barack Obama, and the Democratic Congress he had during the first two years of his first term. Obama ran on a campaign in 2008 in which he promised organized labor that one of his first acts on taking office would be to end all the totally legal delays employers have been able to avail themselves of to stall off, for years, a workplace vote by their employees on joining a union, and then if the workers win, to refuse to bargain in good faith for a first contract. He vowed to win passage for a new “card check” rule where once union organizers had received signed cards calling for a union representation vote from a majority of workers on a job location, a secret-ballot election supervised by the Labor Relations Board would have to be held there. The law would also have imposed a contract if an employer failed over some specified length of time to reach a negotiated contract agreement.
Once Obama won election, he dropped that promise, saying he had “more pressing” things to do before he could take that up. Eight years in office and he never tried. And the Democrats who had a majority during his first term never put that bill up for a vote, either. Meanwhile, the percentage of workers in unions during his eight years in office fell from 12.4 percent to 10.6 percent. That’s a decline of almost 15% in union members over that time under a man who campaigned as a friend of labor who would be walking the picket line with striking workers (something he never did while in office).
Now, ironically, we’re hearing complaints that the wage divide in America is a matter of “pressing” concern, but for eight years, Democrats ignored the pressing cause for that growing divide as employers took all the benefits of a restored economy for themselves — as they continue to do now in the wake of the Trump/Republican tax “reform” that was supposed to lead to higher wages as profits grew.
Economists typically ignore the role of unions in empowering workers even in the specific area where American unions are most focused, which is improving pay and benefits. Yet it hardly needs research to understand that if organized unions working under negotiated contracts have — as is the norm — meant higher pay and better benefits for their members, it compels employers who don’t want to have a union to offer competing pay and benefits to keep their employees from turning to a union for help. When unions, as today, are as weak as they are now, that threat no longer exists. And with that loss of a threat, all workers are at the mercy of tight-fisted employers.
Meanwhile, job mobility — supposedly the individual worker’s best way to win higher pay — is largely a joke in the US, because first of all, employers, who universally oppose a government health insurance program, are the main ones providing workers with health insurance, which workers lose if they are fired or leave the job (or go on strike), making it a powerful tool for serf-like domination. And the digital age means that a worker’s record, including any history of union activism, aggressive efforts to win higher pay or benefits, or taking legal action to defend what few rights an employee actually has, is all included on her or his file, making it hard for such outspoken workers to land a new job elsewhere.
Employment law is stacked against workers, with courts holding that employers can make it illegal for workers to discuss their pay with each other, and even saying that workers have no real right to their job. Absent a union contract, employment is “at will” on the part of the boss, who can fire anyone without cause, and the fired worker has no recourse. Prospective employers also can demand to know what prior employers paid an applicant, but an applicant for a job has know right to know what other workers on a job she or he is applying for get paid.
No wonder pay doesn’t go up when the labor market is tight. Employers are holding all the cards.
Economists don’t know this because power relations don’t fit into economic models, they really don’t care, and for the most part were never really workers. Most went to college and then into jobs at think tanks, Wall Street banks or universities where they earn decent livings, may have tenure (an unheard concept for ordinary workers!), and earn salaries, not hourly pay. They simply don’t “get it,” about being a working stiff.
If economists sincerely wanted to know the answer to the “mystery” of why wages aren’t rising as companies earn record profits, they would talk to some workers, and they should look at the history of repression of the trade union movement, which began with Richard Nixon’s assumption of the presidency in 1968, accelerated under the two terms of Ronald Reagan, and continued under the Clinton, Bush Sr., Bush Jr. and Obama presidencies, and now the Trump presidency.
The only real mystery is why the economics profession in the US, and the financial journalism field, are so blind to the answer.