Wages Will Increase When Productivity Does

There are three things we can say about income with a degree of certainty:

  1. You’re earning less than you did before the financial crisis.
  2. You are overdue for a raise.
  3. You are unlikely to get a raise anytime soon.

If these three statements fit your personal circumstances, you can take some consolation in knowing that you are not alone and that there is likely not much you can do about it.  Using the financial crisis that began in 2007 as a baseline, the Economic Policy Institute found that wages have dropped by an average of up to 5.9%, depending on the category of worker to which you belong. Employees with advanced degrees are the only group that didn’t see its income drop, but that group didn’t see its income rise, either. declining-wages

While the rate of inflation has been low throughout that period, it is still eroding your purchasing power and affecting your standard of living.

Why is income lower today than it was in 2007?

Lower Profits.  A major reason you’re earning less—and why you’re unlikely to get a raise anytime soon—is that your employer is earning less.

As the end of the quarter approached, S&P 500 companies were expected to post an 8.3% decline in first-quarter profits from the same period a year ago.  CNBC reported that Q1 ’16 will be the worst quarter for corporate profits since the financial crisis; it marks the fourth consecutive quarter of declining profits–the first time that’s happened since the fourth quarter of 2008 through the third quarter of 2009.

If your employer is a publicly held company, it will need to answer to shareholders, particularly since the Federal Reserve Board’s efforts to prop up stock prices are less effective than they used to be.  If your employer is privately held, you’re still out of luck.  Private company profits are presumably down as well and, like it or not, businesses exist to make a profit.  When they don’t, they don’t survive.

Lower Productivity Growth.  Company profits are down for a variety of reasons, some of which are out of anyone’s control.  Business cycles, increasing global competition and an aging population are factors, but the most important factor is stagnating productivity growth.

Even the U.S. Bureau of Labor Statistics, which typically puts a positive spin on its economic statistics, concedes that productivity growth has plummeted during the Obama years.  This is an admittedly short period during which to measure productivity, but the drop is extraordinary, as the current rate is less than a third of the average growth rate during the previous period of 1995 to 2010, as well as the entire period of 1870 to 2013.

Alan Blinder, an economist at Princeton University, noted in The Wall Street Journal that the 2.3% average growth in productivity that took place annually for more than 143 years increased American’s standard of living 25 fold, but he says the drop in productivity growth is a mystery. Maybe it’s a mystery to Ivy League academia, but we can think of plenty of reasons for it. ED-AS961B_Blind_16U_20141124122107

Greater Entitlement Spending.  As one writer commented in response to Blinder’s op-ed, “Measured rates of productivity are simply evidence of the cumulative impact of the change in human effort, ambition and risk-taking throughout society. … U.S. data show that total weeks of compensated unemployment more than doubled between 2007 and 2009, due both to the recession and the stimulus bill passed by Congress and signed by President Obama in February 2009. Data also show that food stamp recipients increased from 28 million in 2008 to over 47 million in 2013 with the average benefit increasing more than 30% during this time, also funded by the stimulus bill and subsequent legislation. The number of Social Security Disability recipients has also increased materially.”

When more people receive benefits from the Supplemental Nutritional Assistance Program (SNAP), disability income, Medicaid or other government benefits, fewer people are working and being productive.  Those that are working have to work harder to pay for those who aren’t.

While it is important to care for those in need, some people remain out of the workforce, because they have a financial incentive to do so. Some deliberately take advantage of the system.

“Every month, 14 million people now get a disability check from the government.” NPR reported in 2013.  “The federal government spends more money each year on cash payments for disabled former workers than it spends on food stamps and welfare combined.”

One reason for the rising disability costs is that those who seek disability payments often hire aggressive attorneys.  NPR told the story of the rise of Binder and Binder:

“When he started in 1979, Binder represented fewer than 50 clients. Last year, his firm represented 30,000 people. Thirty thousand people who were denied disability appealed with the help of Charles Binder’s firm. In one year. Last year, Binder and Binder made $68.7 million in fees for disability cases.

“The way Binder tells it, he’s is a guy helping desperate people get the support they deserve. He is a cowboy-hatted Lone Ranger going to court to fight the good fight for the everyman.

“Who is making the case for the other side? Who is defending the government’s decision to deny disability?

“Nobody.”

Higher Taxes on Productivity.  As we’ve previously noted, America has the highest corporate tax rate in the world and it’s the only developed country that taxes revenue when it’s returned home.

That disadvantage was masked somewhat when the dollar was weak, as it kept American businesses competitive with businesses from other countries.  Now that the dollar is strong relative to other currencies, taxes put American businesses at an even greater disadvantage.

Consider, too, that American workers, even with today’s lower salaries, make much more money than most foreign workers.  The average salary in China has risen to 57,361 yuan, which is the equivalent of $8,806.  The average American salary has fallen to $46,481.52, which is more than five Chinese workers would earn.

It your boss gives you a raise, it will be even more difficult to compete with foreign companies.

More Regulations.  Every minute and every dollar spent complying with government regulations is a minute and a dollar spent without adding to productivity.

The Obama administration brought us the Affordable Care Act (Obamacare), Dodd-Frank, the Foreign Account Tax Compliance Act and numerous other new regulations.

Without even including such major regulations, the Obama Administrations has regularly set new records for the volume of regulations produced. The Competitive Enterprise Institute (CEI) noted that President Obama is accountable for six out of the seven yearly all-time high Federal Register page counts. For 2015, the Federal Register, the official journal for government regulations, contained 81,611 pages of new regulations before the last day of the year. The previous record high was in 2010 with 81,405 pages.

Regulations have an impact on job growth and productivity.  They also raise the cost of production, which leads to higher prices and reduced output.  The Competitive Enterprise Institute’s Wayne Crews estimates that regulatory compliance has an economic impact of $1.9 trillion a year.

Increasing Debt.  With the federal debt approaching $19 billion, American taxpayers paid more than $400 billion in 2015 just to service the debt.  That’s money that’s not being invested to increase economic growth or to help businesses become more productive.  The only net benefit to servicing the debt—which is the cost of borrowing money, not the cost of paying it back—is that it enables the U.S. to continue borrowing money without having a negative effect on its credit rating.

Forecasters at the White House and Congressional Budget Office believe that as interest rates gradually rise and debt continues to accumulate, the cost of servicing it will soar to $800 billion by the end of the decade.

Fewer Business Startups.  In Gallup’s Business Journal, Chairman Jim Clifton wrote that, “American business deaths now outnumber business births.”  Based on U.S. Census Bureau statistics, he wrote that 400,000 new businesses are started each year in the U.S., but 470,000 are failing.

He noted that “the U.S. now ranks not first, not second, not third, but 12th” among developed countries in business startup activity. … Until 2008, startups outpaced business failures by about 100,000 per year.  But in the past six years, that number suddenly turned upside down.”

Clifton wrote that, because they are America’s job creators, “when small and medium-sized businesses are dying faster than they’re being born, so is free enterprise. And when free enterprise dies, America dies with it.”

For America to be resuscitated, real change is needed.

 

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