The Long Wait for Wage Gains

Officially, the U.S. economy has been in expansion since June 2009.  Many people find this hard to believe. One reason is that wages have either been flat or falling for much of the period.

A recent study of real hourly wage trends over the period 2007 to 2014 by the Economic Policy Institute (EPI) documents this reality. The 2007 period marks the end of the previous expansion; the recession started in December 2007.  The charts below highlight the results of their study.

This first chart shows that only those in the top wage percentile have enjoyed an increase in real hourly wages since 2007.  Moreover, almost all groups are currently experiencing real declines in earnings. The exception is the bottom percentile and, according to the EPI, “a series of state-level minimum wage increases” is the main reason for their recent gains.

The following two charts separate the labor force by gender.  Again, we see gains only for the top percentile.  Men have experienced steeper declines in hourly earnings than women, although male wages remain higher than female wages.

The last chart looks at real wage trends by education.

As the EPI study explains:

It is clear that those in every education category experienced falling or stagnant wages since 2007. In fact, real hourly wages have declined for 90 percent of the workforce with four-year college degrees since 2007 (not shown). From 2000 to 2014, real wages of the 90th percentile of this group only increased 4.0 percent cumulatively.

The data do show that college graduates have fared slightly better than high school graduates since 2007. This is not because of spectacular gains in the wages of college graduates, but because college-graduate wages fell more slowly than the wages of high school graduates. Notably, despite wage declines in both 2013 and 2014, those with advanced degrees are the only ones who have returned to their 2007 real wage levels.

 These trends only highlight the mean spirited nature of current attacks on unions and resistance to raising minimum wages.

 

Class Interests and Economic Policy

The conventional wisdom is clear—our economic policies should aim at boosting profits.  Success will translate into investment and jobs.  Unfortunately for us, the conventional wisdom is wrong.

Profits are up and so is the stock market, but investment, job creation, and wages all remain flat. Corporate managers are just not interested in investing firm profits in new plant and equipment. They have a better use for them, one that more directly speaks to their interests as well as those of the stock holders they represent.

William Lazonick, writing in the Harvard Business Review, offers one important explanation for what is happening and why:

The allocation of corporate profits to stock buybacks deserves much of the blame [for the trends noted above]. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

Why are such massive resources being devoted to stock repurchases? . . . . Stock-based instruments make up the majority of [corporate executive] pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, overall U.S. economic performance has faltered.

The Pharmaceutical industry is a case in point.

In response to complaints that U.S. drug prices are at least twice those in any other country, Pfizer and other U.S. pharmaceutical companies have argued that the profits from these high prices—enabled by a generous intellectual-property regime and lax price regulation—permit more R&D to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay.

The takeaway here is that boosting profits is not the means to promote the general interest.  If we want more and better jobs we need appropriate public sector investments to stimulate and restructure our economy as well as new labor supporting workplace and wage policies.

The Federal Budget In Pictures

The following charts, taken from a National Priorities Project post, highlight our federal budget priorities.

As the post explains:

President Obama recently released his fiscal year 2016 budget proposal. Budgets are about our nation’s priorities: What are we going to spend money on? How are we going to raise the money we want to spend?

Though the budget ultimately enacted by Congress may look very different from the budget request released by the president, the president’s budget is important. It’s the president’s vision for the country in fiscal year 2016 and beyond, and it reflects input and spending requests from every federal agency.

 Here’s a look at the overall proposed budget:

 

 

Here’s a look at the allocation of discretionary tax dollars:

 

Here”s a look at the relative balance of military and non-military discretionary spending over time:

 

Here’s a look at the structure of taxes supporting federal spending: