The Fallout from Falling US Wages

Real wages in the US rose during every decade from 1830 to 1970.  Then this central feature of US capitalism stopped as the figures below show:

Source: Labor Research Associates of New York based on data from the US Department of Labor, Bureau of Labor Statistics; wages expressed in constant 1982 dollars.
1964 $302.52
1974 314.94
1984 279.22
1994 259.97
2004 277.57

No comparable steady rise in real wages has occurred since.  The most recent data from the Bureau of Labor Statistics indicate real weekly wages declined again over the last year (2005-2006).  American workers’ reactions to this downtrend in real wages have profoundly shaped the nation’s economy and society for the last thirty years.

Stagnant or falling real wages undermine workers’ basic expectations of rising levels of consumption.  Those expectations had become key parts of what it meant to be “an American.”  Rising consumption has long functioned as the evidence of success in achieving the American dream.  When, after the mid-1970s, real wages no longer allowed for rising consumption, wage-earners turned, with growing urgency, toward other ways and means to maintain rising consumption . This delayed the inevitable, a falling standard of living, but at great economic and social cost.

In one “solution” to counteract the problem of shrinking real wages, many families sent more members out to work more hours.  Part-timers switched to full-time positions or else multiplied part-time jobs to secure more income.  Full-timers took second and third jobs.  While this helped, in part, to offset the real wage problem, it also disorganized family and household life.  Time with spouse and children was cut.  So too was the energy and attention adults could devote after work to cope with family problems aggravated by lengthenig work times for family members.  Rising divorce rates, intra-familial difficulties and abuse, and indices of psychological depression became signs of the costs of this partial “solution.”  When mothers’ entry into the paid workforce required costly day-care for dependents and commercially prepared foods, families again confronted insufficient funds to enable increased consumption.

A second “solution” — when longer work hours did not generate enough money to increase consumption — was to borrow.  Multiple credit cards per family and increasing mortgages added to vehicle financing to generate historically unprecedented levels of total consumer debt across the last 25 years — and especially since 2000.  March and April 2006 saw negative real savings rates for the public of 1.5%.  Nor do these stark statistics count the vast sums that adult children increasingly “borrow” from their parents’ savings.

Not surprisingly, the debt service portion of disposable income has also reached historic heights.  Over 15 percent of after-tax personal income repays debt (despite current low interest rates).  Borrowing has thus heaped the costs and anxieties of debt on top of those flowing from increased external work time by family members.  The resulting stress levels contributed to the deepening reliance of millions of Americans on legal and illegal drugs, as well as excess food (the “obesity problem”) and alcohol. As constricted consumption provoked more work and debt, the latter provoked more consumption as a coping mechanism.  More malls filled with more people who increasingly cannot afford to shop there.

Stagnant or falling real wages were partly caused by technological changes and immigration.  The former reduced the demand for labor while the latter increased its supply: a combination resulting in predictable downward pressures on wages.  Yet immigration receives far more emphasis than rigorous analysis warrants.  Other causes of the real wage downtrend were simultaneously its effects: declining union membership and militancy, declining government services and supports to wage-earners, and declining civic (including electoral) participation by the general population.  In genuine desperation, a portion of the increasingly stressed, decreasingly organized, and less community-engaged population turned for support and help toward fundamentalist religion.  Underfunded and less and less functional government agencies and the Democratic Party associated with them lost considerable public support.  Republicans saw their chance to take power.  They positioned themselves as the way to (1) bring the change ever more workers felt they needed, (2) restore badly strained “families and family values”, and (3) support religious institutions as public service providers.  While the Republicans thereby won elections, their free market programs (tax cuts, public service cuts, government deregulation, etc.) never stopped the basic downward cycle of real wages, more work, and higher debt.  Predictably, Republicans now face rising problems in sustaining a public perception of economic progress or wellbeing.

Fundamentalist economic theory accompanied all these developments, the “scientific assurance” to the population that only good things would result from free market programs.  That is, “economics” taught the absolute wisdom of cutting taxes, public service delivery, and welfare, as well as removing government controls and regulations of business.  Economics promised that the resulting inequalities of wealth and income would provide the incentives and capital for greater economic growth beneficial to all.  Economics proved that the outsourcing of jobs, greater immigration, and huge federal budget and foreign trade deficits all brought net social benefits and so were best left unimpeded by any government action.  In fact, the economics profession has debated these issues for the last 200 years without resolution among the contending theories and their analyses.  But that fact got swept aside by the Republican need for one absolute version of “economics” that either denied economic problems existed or else glossed them with a scientific guarantee of imminent, free market solution.

Bush’s recent loss of public approval may signal the limits to the last twenty-five years of economic change and policy.  A vast outrage may arise among Americans who “forget” their beliefs in and complicity with policies that are now becoming exposed as failures and who will insist that they were duped and mislead.  Then the political pendulum can swing as far toward government economic intervention as before it swung the other way.  Such shifts have, after all, happened many times in the past.  “Economic science” may yet again be reformulated in Keynesian or “socialist” terms to justify such shifts (note Latin America’s recent dramatic moves away from its extreme neo-liberal policies after the1970s).

The key questions for many now are (1) how much longer can the combination of real wage decline, rising work effort, debt, and family stress, and deepening social inequalities continue; (2) what might enable Bush & Co. nonetheless to continue the economic direction they champion; and (3) how fast and how far will the backlash proceed if they cannot do so?  For socialists, the key political question is different.  When private capitalism a la Bush hits its crisis, will the chief socialist response be (as it mostly was after 1929) to support a government intervention aimed to save the system by making it more worker-friendly for a while till the crisis passes?  Or will they demand far more basic economic change?

Rick WolffRick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002).