Reaping the Economic Whirlwind

Consider these basic facts about the US economy today.  First, real hourly wages fell, on average, between the first quarter of 2005 and the first quarter of 2006.  At the same time, the productivity of those workers rose.  No advanced degree is required to grasp what’s happening here: workers who produced more output this year than last are getting paid less than last year.  Workers were not only denied any of the extra output they produced, but their reward for increased productivity was to get even less than they did before they became more productive.

But before we examine who got the fruits of increased productivity plus the fruits of paying less to the more productive workers, let’s look at the official numbers provided by the US Labor Department’s Bureau of Labor Statistics.  US workers’ average “real” hourly compensation — where “real” simply means that their money wages are adjusted for the prices workers have to pay — fell by 0.9 % from the first quarter of 2005 to the same period in 2006.  Over the exact same time, labor productivity rose 2.5%.  From a longer, ten-year perspective, the story is, if anything, more dramatic.  Real non-farm hourly compensation was $7.56 in June 1996, rose to $8.32 in June 2002, and retreated to $8.17 in June 2006.  That works out to an increase of 8 % in US workers’ average real hourly wages across the last 10 years.  During the same decade, productivity rose at least five times faster.

The first response to these numbers is “Wow!”  The appropriate next step is to grasp the meaning of this growing gap between what workers produce and what they get.

To do this, let’s divide employees into two sorts: producers (those who actually make what businesses sell) and enablers (those who secure the context for production: the managers, secretaries, record keepers, security guards, work-site cleaners, lawyers, etc.).  Let’s also divide the revenues of most businesses into their three basic uses: (1) to replenish tools, equipment, and raw materials used up in production, (2) to pay the wages, salaries and bonuses of all employees, and (3) to deliver profits to the board of directors for their disposition.

The BLS numbers then tell the following story.  First, the average real wages of both producing and enabling workers rose very modestly across the last decade, while the volume of goods and services they combined to produce rose many times faster.  Much more was produced for businesses to sell, so they reaped much greater sales revenues.  The BLS wage numbers show that those businesses used very little of those extra sales revenues to pay their workers.  So we need to ask and answer the question: to whom did all those extra sales revenues go?  Who got that money?

The two clear winners from the last decade’s combination of fast-rising productivity and stagnant real wages are those people who actually got the extra business sales revenues that resulted from than combination.  The first group is the top set of enablers: the top corporate managers who have taken immense increases in salaries, bonuses, and other parts of their “pay packages” from the increased revenues of the businesses they manage. The second group is the set of those who get direct gains from rising business profits.  When businesses have more products to sell while paying most workers little or none of the resulting extra revenues, the result is a boom in business profits.  Corporate boards of directors use those profits to pay greater dividends to share-holders, to buy other businesses, to expand their businesses, etc.  Rising dividends benefit shareholders, while business growth usually drives up share prices (yielding “capital gains”) and that also benefits shareholders.

So there really is no mystery at all about what is happening to the US economy or why it is happening.  Because those — the vast majority — who do most of the work to produce rising output don’t get most of that extra output, a relatively tiny minority gathers it all in.  That is why every measure of the US economy has been showing a rapidly widening gap between the rich and the poor.

Nor is there any real mystery about how workers have managed to keep their consumption rising over the last decade even as their real wages went nowhere.  According to US Census Bureau data, during the last decade, average household consumption likely increased about 25%.  Clearly, that increase could not have been paid for by real wages since they rose only 8%.  The mystery begins to dissolve once we note that over the last decade US households have sent more members out to work more jobs and longer hours to pay for household consumption.  The mystery dissolves completely once we note the simultaneous, massive explosion of household/consumer debt.  Because most US workers got little or no real wage increases and because they could not or would not correspondingly curtail their consumption, they had to work more, borrow more, and stress more.

Wage stagnation, debt explosion, stress, and widening wealth and income inequality are now basic pillars of the US economy.  And if you sow the wind. . . .

Rick Wolff Rick 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).