The economy keeps improving. Why aren't wages?

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[The crapification of labour. Weak wage growth continues to hurt workers—and poses a threat to Trump's presidency. *RON*]

Danny Vinik, Politico, 5 May 2017

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The April jobs report, released Friday, continued to show good news for the U.S. economy. Employers added 211,000 jobs last month, reducing the unemployment rate to 4.4 percent, a level last reached 10 years ago.

Slow but steady improvement in the labour market has continued unabated for years, but one critical economic indicator has remained stuck: wage growth. Wages have grown just 2.5 percent over the past year, only slightly higher than inflation. Since 2010, nominal wages have grown about 2.5 percent each year, while inflation has averaged 2 percent. Perhaps most concerning, as the labour market has tightened, wage growth hasn’t accelerated.

For all of President Donald Trump’s rhetoric about creating millions of jobs, the real economic challenge of his presidency will be raising the wages of everyday American workers. It’s a problem that continues to confound economists, who have predicted for years that an improving economy would pull wages upward. With fewer unemployed workers, the theory went, Americans like your local bartender or a school janitor could demand a raise. So far, that hasn’t exactly happened.

Why is wage growth so weak? Economists aren’t entirely sure but they have a few theories—and in their own ways, they all pose political problems for Trump.

The economy still isn’t at full employment

Are too many Americans still looking for work that they can’t yet demand higher wages? That’s the argument made by Rep. Ro Khanna (D-Calif.) who says that the traditional unemployment rate, at 4.4 percent, overstates the tightness of the labour market. “There are a lot of people who opted out of the job market,” he said. “The unemployment figures don’t capture that.” A broader unemployment figure—known as the U-6—fell to 8.6 percent in April, a significant decline from January when it was 9.4 percent. But the U-6 still remains above its pre-crisis low of 7.9 percent and nowhere near its all-time low of 6.8 percent in October 2000.

You can see signs of slack in other metrics as well. For instance, the prime-age employment-to-population ratio, which measures the percentage of working-age Americans who are employed, continues to tick upward but still remains low by historical standards. Supporters of this theory argue that the lack of wage growth itself is a clear sign that the economy isn’t at full employment. If it were, they say, wages would be rising.

If this theory is correct, then Trump may have few real avenues to raise wages. Tax cuts or infrastructure investment could provide stimulus to get the economy to full employment. But the Federal Reserve, which believes the economy is just about at full employment, would almost certainly offset any stimulus by raising its benchmark interest rate. Trump, like Obama before him, would simply have to wait as the labour market continues to tighten, hoping that wages rise before his reelection campaign.

“At some point, that string gets run out,” said Douglas Holtz-Eakin, former head of the Congressional Budget Office. “The guessing game has been, when does that happen? It’s hard to say.”

Workers aren’t becoming more productive

Under this theory, wage growth is rising as expected under economic theory—but a lack of productivity growth is holding the entire economy back. Traditional economic theory holds that workers’ wages will rise in line with productivity growth—as they become more productive, workers become more valuable to companies and can demand a raise. If the company refuses to raise wages, workers will switch employers to someone who does adequately value their services. There’s one big assumption at the heart of this theory: The economy is at full employment. Without a tight labor market, employees won’t have the bargaining power to demand a fair wage.

So proponents of this theory, like Jason Furman, a former chairman of Obama’s Council of Economic Advisers, generally believe that the economy is at full employment. “Unfortunately, the more plausible explanation [for weak wage growth] is that productivity growth is running around 0.5% annually so we only should have real wage growth of about that,” he wrote in an email.

Weak productivity growth is one of the biggest economic challenges facing the U.S. economy, a slowdown that began more than 10 years ago and has shown no signs of abating, even as iPhones and computers have become ubiquitous in our daily lives. Economists aren’t quite sure why it’s happening and have a broad range of recommendations for fixing it, from increased federal investments in innovative industries like clean energy to cutting taxes on capital. But Trump has shown little interest in expanding government R&D and his tax reform principles still have a long way to go to become law. Even if either happens, there’s no saying whether such policies would actually improve productivity growth.

“Since we don’t know enough about productivity to know which lever to pull or how hard,” said Holtz-Eakin, “we should pull them all as hard as we can and see what we get.”

Industries are too concentrated

Monopolies may not lead just to higher consumer prices; they also may lead to lower wage growth. This theory of economics—known as monopsony—holds that as industries have grown more concentrated, firms have gained greater control over their workers’ wages. In a world where workers can’t simply switch to a new industry—gaining new skills takes time, for instance—workers have little power to demand a pay raise.

“The concentration of economic power is a huge issue, not just for higher consumer prices but it is giving [companies] more bargaining powers over workers,” said Khanna.

This theory has been garnering greater influence over the past few months, with both Furman and Alan Krueger, another former chair of Obama’s CEA, arguing that monopsony is holding back worker wages. Just this week, the Economist also suggested it could be contributing to reduced wage growth. The upside for this theory is that the government has a proven set of tools to combat this problem: antitrust authority.

The downside is that Trump isn’t expected to increase enforcement of antitrust laws and his pick for the top antitrust job at the Department of Justice, Makan Delrahim, has represented many big firms, including AT&T, Comcast, Qualcomm and Google, on a range of legal matters over the years.

UNLIKE OBAMA, TRUMP is lucky enough to enter the White House with a strengthening economy amid a record streak of job creation. But the long-term challenges facing the economy, notably decades of weak wage growth, still pose significant difficulties for him, in part because of uncertainty among economists over how exactly to boost wages.

Even if wage growth doesn’t pick up during Trump’s presidency, for whatever reason, that doesn’t mean he has no options to improve the economic fortunes of the working class. Khanna, for instance, has proposed a $1 trillion wage subsidy to boost the income of the bottom 40 percent. That won’t increase wages directly; in fact, by encouraging more Americans to work—and encouraging current workers to work more—it could even hold down wages. But the result is still more money in the pockets of low- and middle-income workers. Or consider taxes. Cutting middle-class taxes is another way to expand their income and Republicans may ultimately put forward such a plan. But Trump’s tax principles were heavily weighted toward the rich, and it’s unclear exactly whether or how his proposal would benefit the middle class.

This is by no means an exhaustive list of policies that Trump could take up. But as long as wage growth remains weak, he will have to find creative ways to help the people he called “forgotten Americans,” the working class struck by the twin shocks of globalization and automation. A growing economy without higher paychecks will fail to deliver on his grand campaign promises.

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