Economic Policy Institute: The Wealthy Grow Fat On Your Starvation Wages

This article was originally published by the Economic Policy Institute at their website, epi.org, under the title "The Top 10 Charts of 2014."

This last year saw the pace of job growth pick up, a welcome development. Yet the economy remains far from healthy. In 2014 the twin issues of income inequality and stagnant wage growth for the vast majority of Americans took center stage. Better late than never.

The top charts of 2014 created and compiled by the staff of the Economic Policy Institute show why addressing inequality and spurring wage growth is so necessary–and so doable. Policy choices led to these trends, and different policy choices can reverse them.

The first policy choice should be based on the “do no harm” principle: the Federal Reserve should not try to slow recovery in the name of fighting inflationary pressures until wage growth is much, much stronger.

After this, policymakers should support those labor standards that can restore some bargaining power to low- and moderate-wage workers in coming years. That means policy actions such as passing a higher minimum wage, expanding rights to overtime pay, protecting the labor rights of undocumented workers, and restoring the right to collective bargaining.

In 2014, rising income inequality became a front-burner political issue. This figure shows that the stakes of rising inequality for the broad American middle-class are enormous.  In 2007, the last year before the Great Recession, incomes for the middle 60 percent of American households would have been roughly 23 percent (nearly $18,000) higher had inequality not widened (i.e., had their incomes grown at the overall average rate—an overall average buoyed by stratospheric growth at the very top).  The temporary dip in top incomes during the Great Recession did little to shrink that inequality tax, which stood at 16 percent (nearly $12,000) in 2011.

As 2014 comes to a close, there is a growing recognition that the root of rising American inequality is the failure of hourly pay for the vast majority of American workers to keep pace with economy-wide productivity (output produced in an average hour of work). When hourly pay for the vast majority tracked productivity for decades following World War II, the American income distribution was stable and growth broadly shared. Since the late 1970s, the link between typical workers’ pay and productivity has broken down and allowed capital owners (rather than workers) to claim a larger share of income and allowed those at the very top of the pay distribution to claim a larger share of overall wages. This growing “wedge” between typical workers’ pay and productivity is what needs to shrink if we’re to address rising inequality.

The ability of those at the very top to claim an ever-larger share of overall wages is evident in this figure. Two things stand out: the extraordinarily rapid growth of annual wages for the top 1 percent compared with everybody else (and particularly the bottom 90 percent), and the fact that even workers in the 90th to 95th percentiles—a very privileged group in relative terms—only saw their wages grow in line with economy-wide average wage growth. This means that wage growth of workers in the bottom 90 percent of the wage distribution was actually belowaverage.

Over the entire 34-year period between 1979 and 2013, hourly wages for the bottom 70 percent of American workers grew less than 11 percent. Expressed as an annual average, this comes out to yearly wage growth of 0.3 percent or less. Furthermore, take a look at the late 1990s: Nearly all the wage growth of the bottom 70 percent of wage earners happened in that brief period when labor markets got tight enough—unemployment fell to 4 percent for a two-year spell in 1999 and 2000—to finally deliver across-the-board hourly wage growth.

The most extreme wage disparities are between the heads of large American corporations and typical workers. This figure tracks the ratio of pay of CEOs at the 350 largest public U.S. firms and typical workers in those firms’ industries. In 1965, these CEOs made 20 times what typical workers made. But as of 2013, they make just under 300 times typical workers’ pay.

While pay at the top of the labor market has outpaced nearly every labor market indicator for decades, pay at the bottom—the federal minimum wage—has severely lagged most. This figure shows the decline in the real (inflation-adjusted) value of the minimum wage since its high in 1968 as well as what the federal minimum wage would be today if it had kept pace with the growth of real hourly wages of production and nonsupervisory workers (who make up 80 percent of the workforce) or economy-wide productivity. Had the federal minimum wage kept pace with productivity it would be over $18 today. Though not shown, the federal minimum wage did keep pace with productivity in the 30 years before 1968.

The widespread problem of stagnant hourly wages is not simply a problem of insufficiently skilled or educated workers. As this figure shows, a four-year college degree has been no guarantee at all of decent wage growth. In 2013, average real hourly wages of young college graduates were barely higher than in 1989!

Despite a falling unemployment rate and a stepped-up pace of job growth in 2014, the economy remains far from fully recovered. This is illustrated by the sharp slowdown in nominal wage growth (wages unadjusted for inflation) that has persisted in the recovery from the Great Recession. Given trend productivity growth (1.5–2 percent) and the Federal Reserve’s 2 percent inflation target, hourly wage growth could be twice as fast—around 4 percent—without spurring inflation. And wages could grow significantly faster than this for an extended period of time—say, 6 percent for six years—before they hit the healthy wage target set by 4 percent growth since 2007.

The damage from our too-slow recovery can extend well into the future. As one example, in 2012 and especially in 2013, college enrollment rates among young adults fell sharply off trend and outright declined. If continuing economic weakness is behind this decline (and there’s plenty of reason to think that it is), this means that the scars of the Great Recession and attendant slow recovery could run deep.

The year 2014 saw policy address one aspect of labor market dysfunction—the enormous erosion in employer-sponsored health insurance coverage. Like wage stagnation, this problem was not confined to non-college-educated workers. The share of young college graduates who have employer-sponsored health insurance coverage fell from 60.7 percent in 1989 to 30.9 percent by 2012. For high-school graduates, the decline was even steeper, from 23.5 percent in 1989 to just 6.6 percent in 2012. This rapid unraveling of employer-sponsored insurance, even for recent college graduates, was a key impetus for health reform in 2009, and 2014 was the first year that the coverage provisions went into effect.