Another warning sign of our fragile economy popped up Friday in the latest quarterly employment-cost-index report, which measures the total cost of labor to employers. The index rose by one-fifth of 1 percent — the smallest increase since the data series was launched in 1982.
Without real growth in wages the economy cannot grow because the capacity of people to buy goods and services — what economists call aggregate demand — will remain flat.
This is a problem that we can fix, and there are three obvious ways to address it. But it requires the involvement of government, which makes the rules governing the market. If there is one thing that centuries of experience have taught, it is this: Whatever the rules, businesses adapt.
The median wage — half make more, half less — has been stuck since 1998 at a bit more than $500 a week. In 2013 average pay declined from the previous year in 59 of the 60 salary levels the government tracks. Only jobs paying $50 million or more had higher average pay.
Wages and salaries account for about 70 percent of total income, IRS data show. Total income — which includes proprietor profits, capital gains and other non-wage income — is growing only at the top. Just 1,361 households captured 8 percent of all the real increased income between 2008 and 2012, my analysis of IRS data shows. The rest of the top one percent, or 1.36 million households, got 43 percent of all the gains.
Flat wages demonstrate that America no longer has a labor market, at least not as defined by the United States Supreme Court. The high court has held that a market requires a buyer (employer) and seller (worker) acting without coercion and a reasonable command of the facts reaching an agreement on price (pay).
But instead of negotiating compensation, employers act like car rental companies: Employers set a price for labor, and workers can take it or leave it, often with no negotiating. Lawyers call these contracts of adhesion. They make for efficient commerce for transactions such as car rentals, but have no place in employment if you believe in competitive markets.
One smart solution would be to slowly but steadily raise the minimum wage to $15 an hour, which $31,200 a year for someone who works full-time with no vacation. That idea has caught on the local and state levels, but not in Congress. Because of the upward pressure it would put on jobs paying up to about $20 an hour, about 70 percent of workers would benefit.
Adjusted for inflation, the current $7.25 per hour federal minimum wage is about two thirds of what the wage was in the mid-1960s. America is a much wealthier nation today and yet we allowed the minimum wage to fall in real terms.
Raising the minimum wage will reduce taxpayer costs for food stamps, cash assistance, medical care subsidies and a host of other government programs. These are really hidden subsidies for employers because they help them hold down wages.
Opponents argue that raising the minimum wage is a giveaway program for teenagers. Yet more than three out of four minimum-wage workers are 20 years or older.
For the economy to grow and people’s lives to improve, we need Congressional action.
The federal minimum does not cover millions of workers, including tipped restaurant employees whose base wage is permanently fixed at $2.13 an hour under a law signed by President Bill Clinton at the behest of the National Restaurant Association. Congress first enacted the $2.13 base wage in 1991, making the minimum today in real terms worth just $1.22 per hour.
A higher minimum wage does not cost jobs, as opponents of the law argue. A number of studies, including one that looked at counties that border each other across state lines with differing minimum wage levels, shows slight positive effects and almost no evidence of a negative effect on jobs.
In the long run, a higher minimum wage will encourage greater investment in equipment to replace labor, but that may not reduce employment if aggregate demand grows and creates other jobs.
Setting a minimum threshold for pay is as appropriate a government action to promote the general welfare, as called for in the preamble to our Constitution, as airline safety and regulations governing company stocks.
Unions and inspectors
A second solution would be reviving unions. If you believe in market economics, then you believe in unions. Individual workers have no bargaining power, especially if they do routine tasks.
There are workers with bargaining power — people with unique talents or brand names, which means they are already well paid.
But for the vast majority of workers it is only through collective bargaining that the Supreme Court’s definition of market can be met. No freshly minted high school graduate or a newly licensed kindergarten teacher knows much about the value of their skills. Needing to eat and pay student loans are coercive factors. Employers, especially large employers, have extensive pay surveys and other knowledge, which economists call asymmetrical information because it favors one side. Economists worry about such information, because it distorts markets.
Back in the early 1970s, about a third of American private production workers belonged to unions. Many millions of other workers benefited because at large companies the pay of managers from foremen through middle levels was effectively set by the unions. Smart nonunion employers paid premium wages and benefits to keep unions out, primarily to avoid union work rules.
But as union membership has declined, so has compensation for workers overall. And keep in mind that our major economic trading partners are heavily unionized.
Congress could recognize market economics by creating a level playing field for union organizing. Current law heavily favors employers, with penalties for illegal conduct against organizing that don’t even register a blip on financial statements. Card check, in which workers vote for a union by signing authorization forms, should be enough to require union recognition.
A third solution is hiring more wage and hour inspectors. The federal Labor Department had more such examiners in 1940 today even though the workforce is more than four times larger. The number of actions it has taken to enforce wage laws has plummeted by about half from two decades ago. With the lack of government enforcement, private litigation has boomed. The number of private lawsuits alleging short paychecks grew six fold from 1991 to 2012.
For the economy to grow and people’s lives to improve, we need Congressional action. Workers should be sharing in the proceeds from increasing productivity. That they are not demonstrates that instead of a labor market, we have employers exerting market power to suppress wages.
But Congress will act only when voters make the reelection of representatives depend on raising wages.