Raising America's Living Standards

Where have all the wage gains gone? Four years into a recovery, with unemployment low, inflation under control, and corporate profits strong, workers at nearly all levels appear to be getting stiffed. One recent Labor Dept. study showed that real compensation has actually fallen for the past five years. Other studies show wages and benefits up, but less than in previous recoveries.

At least in the 1980s, stagnant pay could be blamed on low productivity and a high dollar, which hurt exports. Not anymore. Productivity is way up and the dollar is down, making the U.S. an export giant. But that hasn't translated into wage gains. While factory workers with high school educations took the brunt of downsizings in the 1980s, today college-educated professionals are getting hit. Starting salaries for college graduates have lagged behind inflation since 1991.

What gives? There are lots of reasons offered for the wage squeeze: international competition, technology, deregulation, the decline of unions, and cuts in the defense industry. Some people are even talking about America shifting from a consumer to a producer society, a la Japan.

A simpler truth is that America just may not be growing fast enough. The last time income rose was when economic growth was high enough to really tighten the labor market. From 1950 to 1973, the economy grew an average of 3.4% a year. Incomes rose steadily, and a whole generation did better than its parents. From 1973 to 1988, however, growth dropped to an average of 2.6% a year, and incomes grew sluggishly. From 1988 to 1994, economic growth dipped to 2.1%, and income growth deteriorated further.

True, the world is a lot different today than it was in the '50s and '60s. But if history is any guide, an economy expanding at 3% or more annually is more likely to generate real gains in compensation than one limping along at 2%.

Unfortunately, the economic assumptions behind the two balanced-budget proposals floating around Washington promise weak growth. The Republicans assume 2.3% growth for the next seven years. President Clinton assumes 2.45%. What you plan for, you often get, and both proposals foresee anemic expansion--rates that won't boost compensation.

There's a better way. America's current wave of rapid productivity growth is no one-year wonder. It is time for policymakers to consider quickening the pace of economic expansion. After years of weak growth, productivity has shifted back to the 2% range common during the post-World War II period. With productivity so high, there's not much risk of inflation coming from the kind of fast growth that encourages companies to hire, train, and pay for new employees.

An impending balanced-budget agreement gives a fast-growth economy strategy even more cover. For the first time in 26 years, the U.S. is probably going to remove the giant federal fiscal stimulus from the economy, giving savings and capital investment the chance to grow fast without inflation. It is high time the Federal Reserve acknowledged the two new facts of economic life in America: Productivity is way up, and the government deficit is about to go way down. It's time to get growth back up to 3%-plus. To do otherwise risks leaving all those goods and services sitting on shelves, left by a middle class that can't afford them.

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