Home > Uncategorized > The real reasons wages are low

The real reasons wages are low

from Dean Baker

It’s good to see the New York Times making the case for higher wages in an editorial. Unfortunately, they get much of the story confused.

First off, the essence of the case is that higher wages will lead to more consumption, which will spur growth. This is true, but higher pay is not the only way to generate more demand. We also get more demand with larger budget deficits, lower interest rates, and a smaller trade deficit.

But that is the less important problem with the piece. The bigger problem is the assertion that the failure of pay to keep pace with productivity growth over the last four decades is due to higher profits.

“Wages are influenced by a tug of war between employers and workers, and employers have been winning. One clear piece of evidence is the yawning divergence between productivity growth and wage growth since roughly 1970. Productivity has more than doubled; wages have lagged far behind.”

In fact, a rising profit share only explains about 10 percent of the gap between productivity growth and the median wage since 1979. The overwhelming majority of the gap is explained by rising high end wages — the money earned by CEOs and other top execs, high pay in the financial sector, the earnings of some workers in STEM areas, and high-end professionals, like doctors and dentists.

For some reason, the NYT never wants to talk about the laws and structures that allow for the explosion of pay at the top. This would include factors like our corrupt corporate governance structure, that essentially lets CEOs determine their own pay, a bloated financial sector that uses its political power to steer ever more money in its direction, longer and stronger patent and copyright monopolies, and protectionist barriers that largely shield our most highly paid professionals from both foreign and domestic competition. (Yes, this is all covered in Rigged [it’s free].)

Readers can speculate on why these topics are almost entirely forbidden at the NYT, but if we want to be serious about addressing low wages, we have to look where the money is, and most of it is not with corporate profits. And, just to remind people why this matters, the minimum wage would be $24 an hour today if it had kept pace with productivity growth since 1968.

  1. JD
    November 30, 2020 at 2:00 am

    I’m sorry, but how can “rising profit share” explain any part of the gap between productivity growth and the median wage? I may have missed something but it seems to me that a stagnant median wage explains rising profit share, being one of its main causes.

  2. November 30, 2020 at 12:27 pm

    It is quite clear that humanity cannot learn that capitalist growth beyond carrying Earth’s life support capacity leads to extinction.

    • November 30, 2020 at 2:44 pm

      Since half of humanity comprises children and others still learning to learn as they struggle to support and educate their own children, what Garrett says is quite true. Frankly, it doesn’t look as though Dean Baker has learned that what matters is the sustainability of the planet, not relativities in nominal as against take-home wages. (If his CEO’s and other incomes had continued to be progressively taxed, the problem he sees wouldn’t have arisen).

      More to the point is the post-1900 Liberal insistence that we save for our old age, as against not having one, or relying on our children to gratefully repay what we did for them. Not just CEOs but lawyers and parasitic speculators are busy making others insure their old age at a level of luxury they haven’t earned, with their eye on their own future rather than that of the planet. Since humanity cannot learn it is more up to grandparents than parents to advise the rest and help organise the way we live so that it is easier to do what needs doing than admire ourselves. Ins’t that what grandparents do even now, subsidising underpaid children when they are having to set up home in overpriced houses?

      As a granddad who has given all this a lot of thought, I cannot see that the problem will be solved unless all incomes are given: effectively rationed, to reduce physical production to a level the environment can afford. We can afford to throw parties and give prizes, but not exponentially increasing savings from differentials and percentage markups. There are only a few people run governments. These are the ones who it is feasible for a few granddads to show how this solution is feasible.

  3. Questa Nota
    November 30, 2020 at 2:01 pm

    NYT approach, bug or feature? Many would argue for the latter.

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