Happy Labor Day, Citizen Six Pack. Have Some Crumbs

On Labor Day, 1996, the economy is supposedly performing well, yet earnings for most people remain flat. Diverse remedies for earnings stagnation ought to define the axis of the 1996 political debate. With Bob Dole's conversion to supply-side economics, the Republicans have offered their set of remedies for solving this dilemma. But the Democrats haven't really stepped up to the plate. So the election will probably boil down to steady-as-she-goes vs. an eccentric cure that has been tried once and found wanting.

The Economic Policy Institute's The State of Working America, an encyclopedic volume published every other Labor Day, confirms that despite the recovery, the problem of flat earnings continues for most people. (Disclosure: I serve on EPI's board.)

From 1989 to 1994, the median worker had declining wages. Women saw a 1.7% decrease, reversing a slight increase in the early and mid 1980s. The median male wage dropped by 6.3%. Median family income declined by 5.2%. Despite high job creation, earnings have fallen through the current recovery, the exception being 1994, when unemployment was below 6% and median earnings rose slightly--thanks to a peak growth rate that the Fed considers unsustainable.

The rate of job loss during the 1990s recovery is actually higher than during the 1981-83 recession, the worst of the postwar era. The average worker who loses a job earns 15% less in the next job, and 25% lose health insurance.

MIDDLE-CLASS DIP. While the growth in productivity remains sluggish, profits are at a 40-year high. But since this does not reflect higher rates of productivity growth, high profit comes mainly from what would otherwise go to wages.

The EPI compendium also usefully debunks several myths. Isn't the problem really demographic--single-parent families, uneducated young dropouts, baby boomers who haven't yet reached their peak earning years? Evidently not: Between 1989 and 1994, household earnings dropped even for middle-class married couples, by 2%.

Isn't the explanation inadequate skills? In fact, the "return on investment to skills" has declined in recent years. Well-educated people have also faced stagnant earnings. Slow productivity growth suggests that industry is not demanding new skills at higher than historic rates.

Haven't workers taken their pay increases as fringe benefits rather than wage and salary gains? No, according to the EPI. As pension and health insurance costs have been shifted to employees, average total compensation has increased just a tenth of a percentage point faster than average hourly wages.

Aren't we really doing better than the statistics suggest, because inflation is overstated? I'm not convinced, but even so, the increasingly unequal division of economic prizes is irrefutable. While productivity growth has been slow, it has still produced a 25% gain in output per worker over the past 22 years. But all of it went to the top 20%.

INSTITUTIONAL WOES. What to do? The Republicans believe that rates of savings, investment, and hence earnings are sluggish because of the tax burden. Cut taxes, create "supply-side" incentives, and growth and wages will rebound. The Reagan experiment disproved this contention. Growth did increase somewhat in the 1980s, driven by huge deficits. But rates of savings and investment fell. A program of lower taxes and shrunken public services is an ideological choice, not an economic cure for slow growth, much less for earnings inequality.

An alternative explanation is to examine the recent shift from managed capitalism to laissez-faire. In the 1980s, we deregulated, weakened unions, found cheaper labor abroad, privatized public services, shrank the safety net, and gave exorbitant rewards to financial capital and to CEOs. All of these trends cut in the same direction: They undermined tacit social compacts that once gave wage workers more security, more bargaining power, and a bigger share of the total product. Higher growth and tighter labor markets would help restore some of this lost bargaining power, but the dynamics are also institutional.

You won't hear that story from most Democrats. Instead, the Clinton campaign will emphasize the good economic news and offer some mild token programs to palliate the sting of these transitions. So as November approaches, the battered electorate will sense that neither candidate is quite addressing the real pocketbook distress, extraneous issues will crowd out a genuine debate about how to restore broad prosperity, and the election will likely be close as well as surly.