In Through the Looking-Glass, Alice meets the White Queen, who proceeds to explain that she “remembers” the future. Alice responds, reasonably enough: “I can’t remember things before they happen.” The White Queen is unimpressed: “It’s a poor sort of memory that only works backwards.” In his State of the Union address in January, Barack Obama seemed to be remembering the future—touting potential pieces of legislation that will never pass, touting victories that never were (as in a claim that he had gotten Iran to cease enriching uranium), and touting his own electoral success two months after his party was decimated in the midterm elections.
The president asserted that his economic policies have worked and the recovery is here, that he deserves the credit for it all, and that when 2017 rolls around, we will have become the beneficiaries of still more programs that will continue to pave the golden path forward. He certainly did have some good news to report: 2014 was a year of sustained job growth and economic growth, and lower prices for gas had Americans optimistic for the first time about the prospects of recovery. But for those unfortunates whose memories work backwards, there was the problematic fact that only 11 days earlier, the monthly jobs report offered a sobering view of the central problem with Obama’s economy as he began his seventh year in office. It showed that, in the month of December, as more Americans found jobs, their wages went down 0.2 percent. Hourly average private-sector earnings dropped by a nickel.
In a recovery, you would expect to see higher median income. In Obama’s recovery, median incomes have actually dropped. Median inflation-adjusted household income in 2013 was $2,100 lower than when President Obama took office (and $3,600 lower than when George W. Bush took office). Productivity is up by 7.2 percent since the end of the recession, but hourly wages at the end of June 2009 were the same as they were at the end of October 2014: $22.15. Most Americans didn’t lose their jobs during the recession. But most Americans haven’t seen their incomes go up in this recovery.
This is the crisis known as “wage stagnation.” Now, to hear liberals and Democrats speak over the past few years, you would think the fact that the rich have been getting richer is the principal economic problem of our time; this is the “inequality crisis” we’ve all heard so much about. In the words of the liberal Economic Policy Institute’s 2013 report, A Decade of Flat Wages, “Income growth has been captured by those in the top 1 percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.”
Driven in part by Thomas Piketty’s influential book Capital in the 21st Century, income inequality was a major talking point during the 2014 elections—along with the improving economy and the increase in jobs. So, when the results of the midterms proved so disastrous for Democrats, leading liberal opinion-makers, from the blogger Josh Marshall to the TV host Jon Stewart, understandably wondered why the American electorate would so definitively reject what the incumbent party was offering. For Marshall, the answer was an overemphasis on inequality. “Fundamentally, most people don’t care particularly how astronomically wealthy people are living their lives,” he wrote at Talking Points Memo. “It is a distant reality on many levels. They care a great deal about their own economic circumstances. And if you are not doing any better than you were 5 years ago or a decade ago or—at least in the sense of the hypothetical median wage earner—40 years ago, that’s going to really have your attention and shape a great deal of your worldview and political outlook.”
This was a surprising insight—that Americans may covet their neighbor’s property but are clearly more animated by concerns over their own paychecks than they are resentful of the paychecks of others. And yet while the issue of income inequality was hotly debated in the run-up to the 2014 election, wage stagnation received far less attention. Why? Might it be that an honest reckoning of stagnation requires the honesty to acknowledge that progressive policies play a significant role?
It has been an economic axiom in recent decades that pay is stagnant because of astonishing increases in productivity. Those productivity gains mean that fewer workers and resources are needed to get done what employers need to get done. But productivity increases are only part of the story. The other part of the wage-stagnation crisis starts with government. Legislators and regulators have imposed mandates requiring private-sector employers to provide non-cash benefits, which have significantly raised the cost of having a full-time employee. At the same time, the growth of regulations at all levels (local, state, federal) forces businesses to spend dollars that might go into employee pockets on other things. For decades, Americans have experienced the rising cost of goods primarily in highly regulated, government-incentivized areas of the economy—health care in particular. But those costs have also been hidden, at a remove from the earnings of many Americans.
Might it be that what we’re really seeing with wage stagnation is an indication that, for many low and middle-income workers, the compensation that would’ve gone into their pocketbook as cold hard cash is instead going in other directions—namely, to nonwage benefits? The left has its own answers for why wages remain stagnant in a time of improving productivity and economic growth. The Economic Policy Institute’s post-election January 2015 report talks about not only productivity gains and income inequality but also the decline in union membership, an insufficiently juiced minimum wage, the lack of more protectionist trade policies, the presence of more undocumented workers, and the absence of more sick and family leave. But are these really the culprits?
According to economist Scott Winship, of the Manhattan Institute for Policy Research, the productivity gap simply doesn’t tell the whole story. According to his estimates, nonwage compensation as a share of total compensation effectively doubled from 1969 to 2011. In fact, Winship has calculated that when you compare real hourly compensation for the nonfarm business sector, it actually tracks closely with productivity measures over the past 65 years. His view is bolstered by James Sherk, of the Heritage Foundation, who says that while just looking at wages alone seems to support the arguments of progressives, expanding the picture to include noncash benefits offers a markedly different view. The Bureau of Labor Statistics has a category it calls Labor Productivity and Costs (LPC), which includes noncash benefits. In Sherk’s words, “While hourly cash wages measured by the payroll survey have fallen 7 percent since 1973, total compensation as measured by LPC has risen 30 percent.”
For businesses large and small, this increase in expected (and increasingly mandated) benefits has had a significant impact. According to the National Small Business Association’s annual survey of their members, employers reported that the average cost of their monthly health-insurance premiums per employee increased from $590 in 2009 to $1,121 in 2014: “Beyond the health-insurance premiums, employers report additional health-care-related spending to the tune of $458 per month, per employee. Furthermore, a whopping 91 percent reported increases in their health plan at their most recent renewal while 96 percent reported increased health-insurance costs over the past five years.”
Even the Ivy League is vulnerable to such pressure. In a story ripe with schadenfreude for opponents of Obama’s health-care law, the New York Times’s Robert Pear reported in January that the professors of Harvard University who championed ObamaCare are in open revolt now that they have to abide by its consequences: They learned they would have to pay more for their health-care benefits. For professors such as Richard Thomas, used to Harvard’s incredibly generous benefits, such steps were inconceivable. He pronounced the requirements of modest co-pays and a $250 annual deductible ($750 for families) “deplorable, deeply regressive, a sign of the corporatization of the university.” And all this due to a mandated benefit he supports!
Health-care costs are not the only burden. The problems are deepened by a host of other regulatory requirements imposed by the administrative state every year. The American Action Forum, which tracks the costs of regulation, recently found that Obama’s administration levied $181.5 billion in regulatory costs in just 2014 —$692 per capita for each American voter. In terms of finalized regulations, the Obama administration has added $95 billion in annual costs to the private sector. And if these numbers seem too large to comprehend, consider how they affect specific industries. Take, for instance, the calorie-labeling requirements for restaurants and vending machines, finalized last year. To comply with them, small businesses and franchises have been forced to shell out $1.6 billion.
There are essentially two kinds of business regulations in America today, both of which affect wages negatively. First are direct labor regulations—the minimum wage, health benefits, vacation requirements, maternity and paternity leave, disability payments, and more. All of these have a direct impact on how much each worker costs an employer to employ. Government can raise the price of things, but it cannot raise their value. If the worker’s value and productivity doesn’t meet or exceed these real costs, employers won’t hire or retain him. But there is another side to that problem: For workers who are sufficiently valuable to be employed, the cost of these regulations and mandated benefits will often offset or mute real wage gains.
The second kind of regulation—requirements of the Occupational Safety and Health Administration (OSHA), occupational licensing (which has dramatically expanded since 1970), environmental requirements, business taxes, paperwork, and more—has an indirect effect on wages. These are expensive, but they don’t directly affect the cost of hiring each worker. Those regulations require businesses to produce, and consumers to purchase, goods that aren’t in demand (such as giant nutrition boards or unnecessary ramps and rails). Being required to buy things they don’t want along with the things they do lowers real disposable incomes. And employers who can’t pass on these new costs to consumers and can’t or won’t eat the costs themselves will find the money for them by limiting the compensation of their workers.
In all of these cases, employers must choose between shouldering the costs themselves, trying to shift it to consumers, or minimizing worker compensation—effectively decreasing real wages for everyone. In many cases, increased regulatory costs simply can’t be passed on. Most business owners are not the monocle-wearing fat cats portrayed by the left, but whichever path they choose, the low- and middle-income workers involved are no better off. And what costs hit the small businesses first eventually extend to larger institutions as well. First they came for the fast food workers, but the Harvard professors did not speak up…
In today’s economy, where roughly 30 million working-age Americans lack jobs, the wage picture for lower-skilled workers seems unlikely to change anytime soon, and the barriers to a well-paying job can seem enormous. This is exacerbated by progressive policies that often encourage unemployment over low wages for low-skilled workers. A 2013 study by the Mercatus Center at George Mason University recently found that while a proposed one-dollar increase in New Jersey’s minimum wage would not negatively affect college-educated workers, it would boost unemployment for workers without a high school diploma. The money to pay that minimum wage has to come from somewhere, after all.
As LaVaughn Henry, vice president of the Federal Reserve Bank of Cleveland, put it in a November 2014 report: “It may seem counterintuitive that wages and salaries are growing the slowest in industries where jobs are growing the fastest, but it actually is not. It is primarily due to the wide variance in jobs in the service sector. Some service jobs, such as high-tech professionals, health-service professionals, and engineers, have higher barriers to entry, including the need to acquire more training and credentials. Many others, such as some jobs in leisure and hospitality and wholesale and retail trade, have much lower barriers to entry than the high-skilled, high-tech positions that are being created in the skilled manufacturing and construction sectors. And because these high-skilled jobs continue to increase in demand, average wage and salary rates have risen faster than they have in the lower-skilled sectors.”
We see the same factors at work today in the left’s repeated attempt to offer government largesse or regulatory requirements to pay for the things American workers now view as out of reach. Rather than wrestling with the question of child care in the era of the two-income household and the importance of upbringing, we see demands for national child-care and pre-kindergarten programs to fill the gap. Rather than questioning whether everyone really needs a four-year college education, progressives want to embark on a massive debt-forgiveness program, pouring taxpayer dollars into the heavily insulated halls of higher ed. Concerned about your birth control? Don’t worry, we’ll make your employer cover it. Here is a cake for you to have, and to eat, and someone you don’t know somewhere else will pay for it, eventually.
But there is no “someone else.” The progressive approach—to which everyone has effectively assented—merely disguises the problems of wage stagnation, redirecting those funds toward health care, housing, energy, education, and more, to the detriment of take-home pay. And all the while, liberals have ignored and continue to ignore the possibility that the increase of regulations, incentives, and mandates would have any trade-offs.
That includes the president. In his State of the Union, he proudly announced that “Since 2010, America has put more people back to work than Europe, Japan, and all advanced economies combined.” But in the next breath, Obama insisted on more mandated benefits. “Today, we’re the only advanced country on Earth that doesn’t guarantee paid sick leave or paid maternity leave to our workers,” he said. “Send me a bill that gives every worker in America the opportunity to earn seven days of paid sick leave. It’s the right thing to do.” It also costs money. Investors Business Daily’s Jed Graham calculates that seven days of mandated paid leave would add 30 cents per hour in compensation costs, bringing Obama’s six-year total to $5.06 had all his proposals been made law. As the American Enterprise Institute’s Mark Perry has observed, the reason America has done better over the past five years might have more than a little to do with the fact that our private sector is far less encumbered by mandates and regulations than those of all other advanced economies. If we adopt their policies to a greater degree than we already have, we can add their economic stagnation to our income stagnation.
As a political issue, the challenge of wage stagnation has legs. According to the Associated Press’s exit poll during the November midterm elections, nearly half of Americans said their financial situation had not improved in the prior two years. One out of 4 surveyed said their financial situation had actually worsened in that time frame. They voted Republican by better than a 2-to-1 margin.
For conservatives, this should suggest an opening. But it is also an indication that the pro-growth policy path is not necessarily the old-school supply-side path of individual tax-rate cuts. Instead, the real path toward the kind of growth that will benefit American workers ought to focus more on regulatory and general government reform. The economic problem the nation faces today is an economy increasingly warped by government.
There are many possible paths for conservatives to consider in expanding their appeal to middle- and working-class voters. But broadly speaking, the most encouraging aspect is that even after six-plus years of being promised the Life of Julia—in which government will be there for you, cradle to grave, even if your pay stub disappoints—voters appear to care more about their own bottom line than the promised security of free stuff. Those who’ve been insulated from the realities of these trade-offs for years—whether unionized public-sector employees or professors at Harvard—are finding that this world they helped create was not the one they intended to live in. But most people have not had the comfort of such insulation, and if they are given the chance to choose, most would prefer a job where they can earn more money for themselves and their families to spend or save or waste as they wish.