WASHINGTON, September 8, 2015 − In their September 7, 2015 editorial, “You deserve a raise today,” the editors of the New York Times made the argument that companies should raise the pay of their workers, since workers need more money to raise their standard of living. The editors note that wages have stagnated or declined for most working people, including college graduates.
The NYT editors need to understand how our economic system works.
They say that “flat or falling pay is self-reinforcing because it dampens demand and, by extension, economic growth.” Is that true?
Not exactly. Stagnant wages coupled with rising productivity, reduce costs to business. This allows them to sell the products at a lower price which benefits the vast majority of American consumers. The lower labor cost also slows outsourcing which means the workers will continue to have a job.
The editors further point out that since the 1970s, median pay has risen by only 8.7 percent after adjusting for inflation, while productivity has grown by 72 percent. Since workers are paid according to the value of their output, the editors argue that wages should have increased substantially more than they have.
According to the editors, the reason, that wages have been held down is that while rising productivity has boosted corporate profits, the additional profits have gone to chief executives who now earn about 300 times more than the typical worker. Clearly, they say, corporate greed is holding down wages for the average worker while executives, who create perhaps 500 times the value of the average worker, and stockholders, who own the company by risking their capital, are benefiting greatly.
It is worse for recent college graduates whose average hourly wages have decreased by about 2.5 percent since 2000. It is also worse for high school graduates whose average hourly wages have fallen more than 5 percent since 2000. Are the editors right about this?
Let’s first note that while the data they select to draw their conclusions is correct, is has been misinterpreted. Clear evidence of that is found when we look at personal income, which includes wages and all other forms of income like rent, interest, profit, dividends and capital gains. Americans’ personal incomes have risen virtually every year since the data has been collected.
The real fallacy in the logic occurs when one ignores the upward mobility of workers who are prepared to contribute to a growing economy and who have increased their value (and pay) by taking on greater responsibilities. Those who stagnate in their jobs see stagnant wages.
According to the census bureau, personal incomes have increased for virtually all Americans from 1967 to 2015. This points out that while wages for a specific job may be stagnant, Americans are increasing their total income by investing their savings to earn interest or dividends and by moving upward to a job where greater responsibility is undertaken resulting in higher income. The stagnant wages that the NYT discusses applies to people who stay in the same job.
The truth is that as economies mature, the emphasis changes. Economies first transition from a dependance on agriculture, to a dependance on manufacturing, finally evolving into economies primarily relying on services. Today about 70 percent of US GDP comes from the service sector with the remaining 30 percent coming from producing goods in the manufacturing sector. As the US continues to mature, manufacturing is likely to fall further as services increase.
While many people view service jobs as low paying, the reality is that service jobs include doctors, lawyers, professors, teachers, scientists, researchers, police and fire personnel, elected and appointed government officials and financial service professionals, to name just a few. In those professions, wages are generally rising.
For those employed in the manufacturing sector, the reduced demand for US made goods will keep their wages down. While this is a definite problem for them that must be addressed, the majority of Americans benefit by purchasing foreign made products at much lower prices. This allows consumers to purchase more goods and services which raises the standard of living for them. The smart phone in your pocket probably cost about $600. If the phone was completely made in the US it would likely cost $1,800.
Another fallacy is that the NYT editors claim that raising wages for workers will raise the standard of living for Americans. That’s wrong because as labor costs increase, firms pass along the increase to consumers. The result is the wages rise for a few workers, while purchasing power falls for the majority of Americans.
The NYT is correct when saying that workers should be paid according to the value of their output. The problem is that while the workers may produce more, because of foreign competition and outsourcing, the price of the goods they produce falls, making the value of the workers’ output less. That’s why wages aren’t rising.
Primarily because of the Great Recession and the six plus years of the Obama stagnation, GDP has grown at an average growth rate of just over 2 percent annually. After the more severe recession in 1981, the economy averaged about a 4 ½ percent growth rate during recovery.
Obama’s poor policy making and the resulting poor economy have reduced the demand for recent college graduates thus pushing their wages down. This can easily be fixed by taking policy actions that encourage economic growth. Such policies include lower taxes for all Americans, the reduction of regulatory and mandated benefit burdens and a reduction in income transfer programs that pay people more to not work than they could earn when they do work. This is exactly opposite to what Obama has done.
If workers truly desire to increase their wages, they must figure out how to add more value to the economy. Not only will all Americans benefit from this. Those value-adding workers will truly deserve a raise.