Sharing Prosperity

Real wages are finally starting to rise. Can this trend continue without igniting inflation? Yes, if...

The booming economy has even made it to Batesville, Ark. Last March, the 1,400 or so workers at a ConAgra Inc. chicken-processing plant got hefty raises, amounting to 17% over the next four years. And the 5% hike in his new paycheck pushed G. Ted Oliver, a 27-year veteran who works at the shipping dock, up to $8.96 an hour. "This is the best contract we've ever had," says Oliver, a member of the Teamsters.

But the 46-year-old Arkansan is still apprehensive. He and his co-workers have a long way to go to regain the ground they lost in the 1990s, when ConAgra dished out less than inflation every year. Even after this year's raise, Oliver is pulling down 5% less in real terms than in 1988. And he'll still be behind after the rest of the raise kicks in. Meanwhile, he has been working 9- to 10-hour days and six-day weeks for the past three years and sells horse feed on the side to maintain his income. His wife works at another ConAgra plant in town and sometimes cleans offices to help pay their daughter's college tuition. Says Oliver: "We've been strapped, and we're still not even back to where we were."

Multiply Oliver's story across the U.S., and you get a fuller picture of what many pundits call today's "golden" economy. After six years of growth, jobs are plentiful and most Americans finally are taking home paychecks that beat inflation. But one year of broadly shared prosperity isn't nearly enough to make up for the two decades of stagnant living standards weathered by the bottom three-quarters of Americans.

The point was driven home by the dramatic 15-day walkout at United Parcel Service Inc., tentatively settled on Aug. 18. Strikers garnered a remarkable amount of public sympathy by demanding that the Atlanta-based company shift its growth away from part-time jobs to better-paying full-time ones. Like most companies, UPS is raking in record profits, so its desire for lower costs resonated less with many Americans today than it might have several years ago. Rather, the strike touched a nerve with a broad swath of the public feeling a squeeze that's borne out by statistics. According to the Commerce Dept., wages and other compensation as a percentage of national income have declined for four consecutive years, from 1993 through 1996, while corporate profits as a share of national income rose sharply over the same period. Why, many people found themselves asking, are so many being left behind when companies are doing so well?

Labor leaders jumped into the fray with troops and strike funds, hoping the national mood, galvanized as it was by the Teamsters' fight against part-time work, would help reignite support for unions overall. "The growth needs to be shared with all those who produce the wealth," says Richard L. Trumka, secretary-treasurer of the AFL-CIO. "If this is the best we can expect from the much heralded new economy, then workers and their families are in big trouble."

It's true: The U.S. still has a two-tier economy, and many Americans are struggling to get ahead. Average wages today remain lower, after adjusting for inflation, than their all-time peak in 1973. A vast number of people labor in lower-skilled, lower-wage jobs that, like the part-time UPS slots, offer few prospects for on-the-job training or advancement. Family incomes, adjusted for inflation, have recovered just half their losses from prerecession levels of 1989. Heady stock market gains primarily benefit the top 25% of families, leaving big-ticket items of the American dream such as new homes and cars still out of reach for many. And while income inequality at last has begun to narrow, the chasm between top and bottom is much wider than it was 25 years ago (charts).

All the more reason, then, to welcome the fact that growth, after six years, has finally begun to permeate all layers of the economy. Wages are now up 1.4% in real terms in the past 12 months ended in June, and unemployment is the lowest in 24 years, making America's job-creation the envy of the world. At the same time, U.S. companies have become tough global competitors, inflation has been quelled, the stock market is near its all-time high, consumer confidence is strong, and even the government is no longer spending beyond its means. In such a favorable environment, the economy should be able to tolerate several more years of solid growth without igniting inflation. "We can keep doing this for four or five years," says NationsBank Corp. chief economist Mickey Levy.

Real wage growth of 1% a year for four or five years would go a long way toward redressing America's wage problem. It wouldn't exactly be a replay of the glory days of the 1950s and 1960s, when U.S. living standards zoomed; that kind of progress was powered by 3% wage growth in real terms. But modest real wage gains of 1% over several years would at least begin to make workers whole again, bringing the symbols of the good life--cars, vacations, homes--within closer reach. Just as important, gains at that level would keep the economy in equilibrium. Since 1990, productivity has grown by 7%, while wages and benefits have grown by 1% in the same period, so there's room to catch up without entering an inflation-triggering danger zone. "Modest wage gains can be covered by productivity," says Brookings Institution economist Gary T. Burtless.

It's even possible that the U.S. might be able to afford more substantial wage increases without igniting inflation. Official statistics show productivity growth averaging 1% a year. But many experts believe that growth is understated and that productivity growth in the high-tech age, though hard to measure, may actually be as high as 2%. Real wage gains, then, could also reach 2% safely.

Whatever happens to productivity, a powerful array of downward pressures--from greater use of part-time and temporary workers to persistent downsizing--is restraining pay. It's even possible that, over the long run, continued tight labor markets might spur capital spending and hence productivity growth.

NO CASH. A steady course of healthy growth would also help ease inequality and other problems of stagnation. Throughout the 1990s, many experts have advocated a wide range of human- capital strategies to boost productivity and help U.S. workers compete in the global economy. But until recently, many companies were too worried about controlling costs to think about major investments in long-term training and education programs for employees. And governments at all levels have been too strapped for cash to rebuild crumbling schools, improve education, and help make college more affordable. Until now, most attempts to help have seemed little more than tinkering at the margin.

Today's vibrant economy, though, makes ambitious efforts seem more feasible. With profits hitting 40-year highs, more employers now can afford to take a longer view and devote more resources to workforce education. Low joblessness also gives Corporate America a powerful incentive to lift skill levels and to hire the marginal workers they reject when labor is abundant. "As companies find labor markets tightening, we'll have to invest a lot more in the education of our employees," says Tupperware Corp. CEO W.L. Batts, who just ended a term as chairman of the National Association of Manufacturers.

Government, too, has more resources these days. President Clinton's new tax breaks for college are a step toward bringing higher education to the lesser-skilled who are largely shut out of the best-paying jobs. States and cities, with surpluses beginning to flow, may now begin spending more on school reform and on efforts to link community colleges to small businesses, which often lack the resources to keep their workforces at globally competitive skill levels. Minneapolis, for example, has a rich infrastructure of training programs and incentives for workers and employers alike. Now, with unemployment as low as 3%, the city is thriving.

But while training and education are important, the best cure for America's ills is more of today's decent growth rates. Only general pay gains, even at a modest 1%, can begin to pull Americans out of the ditch of the past 25 years. A look at hourly wages shows how deep that ditch is. Ever since 1973, wages have fallen behind price hikes during recessions and failed to make up the loss in recoveries. So paychecks have bought less at each new peak of a business cycle than at the previous high point.

This cycle has proven to be even worse. It has taken six years for wages just to begin to outpace inflation. Average pay only made real progress in the past year, when it beat inflation by 1.4%, according to an analysis of monthly Census Bureau data by the Economic Policy Institute (EPI), a Washington, D.C., think tank. That's the second-largest jump in 25 years, after 1986.

It will take several more years like this one to make up the lost ground. At $10.49 an hour on average, wages are still nearly 8% below the all-time high of $11.35 an hour, reached in 1973, after inflation adjustments. They won't get back to 1989 levels for roughly three more years at today's 1.4% annual growth rate. It would take five years to return to the postwar peak of 1973.

However, real wages may actually be higher than officially stated, as the Presidential commission that examined the Consumer Price Index' ability to measure inflation has found. It determined that the CPI consistently overstated inflation by about one percentage point a year, therefore understating real wage gains. Even if true, however, the downward trend in real wages remains intact.

Household incomes also show weakness. They fell by 5% in real terms during the early 1990s recession, according to Census Bureau figures. And they slipped an additional 2% during the first few years of what experts dubbed the jobless recovery. Incomes began to climb again in 1994 as job creation picked up and families could send more people to work. By 1995, however, the latest year available, the average household still took in 4%, or $1,500 a year, less than in 1989. "If we have a recession before we get back to 1989 income levels, it will be the first business cycle ever where families have had no gain," says Larry Mishel, the EPI's chief economist.

Nor does the roaring stock market change the tale. While it may seem that everyone has a 401(k) nowadays, many Americans still own little or no stock. True, stock ownership by individuals has climbed steadily in the past decade. But some 71% of households own no shares at all or hold less than $2,000 worth in any form, including mutual funds, 401(k)s, and traditional pensions, according to a 1996 study by Massachusetts Institute of Technology economist James M. Poterba and Dartmouth College economist Andrew A. Samwick. So juicy market returns do little for the average person. Instead, they fatten the wallets of the top quarter of households, which own 82% of all stock, they found.

The good news is that despite the markets' recent jitters, the economy still appears fundamentally healthy. And a host of long-term forces are likely to keep pay pressures from exploding.

One is the relative availability of labor, even at the current 4.8% unemployment. When the U.S. approached full employment in the 1950s and 1960s, companies had to compete for scarce workers at every skill level. Today, nearly a third of all workers are stuck in lower-skilled jobs paying less than $15,000 a year, EPI figures show. So employers can find plenty of eager applicants willing to jump ship and trade up to fill well-paying jobs that don't require a college degree--a category that, surprisingly, covers three-quarters of all jobs. The hitch: employers usually must train them. "I see help-wanted signs at McDonald's, but I still see people trying to knock down the door at our company for good-paying jobs," says E.W. Deavenport Jr., CEO of Eastman Chemical Co., in Kingsport, Tenn., whose 16,000 employees average about $13 an hour. "There's still ample labor out there, despite the labor crunch that people have been hyping."

Even today, anxious job-seekers overwhelm any employer offering "good" jobs. In April, 20,000 applicants flooded the Los Angeles County Fire Dept. after it announced plans to hire 100 firefighters a year at $36,000 a year. And last year, more than 100,000 applicants bombarded Michigan's state employment office after the Big Three auto companies announced they would be hiring blue-collar workers. Those unionized jobs start at $13 an hour and hit $20 after three years. The carmakers have hired only about 1,000 people through the agency, and the applications are still pouring in. "I could work at Chrysler and make more than I do at the two jobs I have now," says a frustrated LaToya A. Jarvis.

When she heard about the Chrysler Corp. openings in June, Jarvis ran to apply, only to find "a line wrapped around the block just to get an application," she says. Jarvis, who has two years of community college under her belt, works six days a week. At a car wash in Oak Park, Mich., she earns $8.25 an hour. Then she works processing checks at Comerica Inc., a Detroit bank, for $7.43 an hour. She hasn't heard from Chrysler--and doubts she ever will. "Chances are I'll be waiting forever for a job like that," says Jarvis.

Persistent downsizing and outsourcing should also keep wages from hitting the inflation point. In prior business cycles, most employers laid workers off when the economy slumped and hired when it soared. In the 1990s, companies have continued to restructure to control costs even as the economy grows, so high levels of job cuts continue. The share of workers losing jobs held a year or longer jumped significantly, to 15% of the workforce, for the three years ending in 1995, according to an analysis of Bureau of Labor Statistics (BLS) data by Princeton University economist Henry S. Farber. That's higher than any time since the series began in 1981--including in the recessions of the early 1980s and early 1990s. Later data suggest that job cuts remain a way of life, even in today's brisk economy.

Downsizing also restrains overall wage pressures because it lowers the paychecks of millions of workers every year. On average, displaced employees who find new jobs earn 14% less in their new posts, according to Farber's analysis of BLS job-loss data going back to 1981. The effect is magnified today because white-collar and older workers, who are more expensive, are more likely to get the boot than they were in prior recoveries, Farber found.

BIG PAY CUT. Just ask Barton Anderson. In January, he lost his job as a plant manager at a 600-employee envelope maker in Louisville after the company shut two of its four plants. In May, Anderson, 48, with a wife and three children, landed a post as director of materials management at FastCast Corp., a Louisville startup with a patent to make equipment that opticians use to grind lenses in their own offices. He's happy to be in an industry with more promise of growth. But he took a 10% pay cut from his previous salary of $90,000 and has no stock options, as he did before. Anderson is now hiring staff as FastCast ramps up. And many hirees are taking pay cuts, too. "I'm picking up a lot of people from big companies," says Anderson.

Companies also hold down labor costs by using more part-time and temporary workers, a la UPS. Their numbers have grown more slowly as lower unemployment gives job seekers more options. But they still have climbed by 5% since 1993, to 22 million today, according to BLS data. And the temporary-help industry has jumped by 27%, to 2.3 million, since then. In addition, a recent Supreme Court ruling allows companies to continue to expand their use of workers hired as independent contractors. These self-employed workers, who number more than 9 million, BLS surveys show, often lower companies' labor costs because they earn less or get fewer benefits. So do part-timers, who earn $9.19 an hour, including benefits, or half of what full-timers make, says the BLS.

DOWNDRAFT. Then there's the impact of welfare reform. Job-hunting by 2 million or so welfare recipients expected to join the labor force in the next four years will have the most impact on the bottom third of the workforce--about 31 million employees. If just 1 million recipients land jobs, this labor pool would expand by 3%. That's enough to drive down this group's $5.50-an-hour average wage by 12%, EPI estimates. Of course, a strong economy would help offset the downdraft by absorbing more workers. Still, many welfare mothers may simply displace existing workers. Welfare reform will add workers who are "unskilled, a lot at the minimum wage, which will release people in those jobs now who have work experience and push them up the job ladder," says Tenneco Inc. CEO Dana G. Mead. "That will take pressure off labor shortages."

Over the long term, it may even be that the tight labor markets and slowly rising wage costs that come with a purring economy could spur productivity growth. Economists have struggled for years to understand why productivity slumped from 3% annual gains in the 1950s and 1960s to 1% or so since 1973. Now, a growing number think the answer lies in part with how much employers have to pay for a unit of capital vs. a unit of labor.

In the '70s and '80s, an influx of baby boomers and women flooded the labor markets with inexpensive workers, says Northwestern University economist Robert J. Gordon and others. At the same time, oil price shocks lifted the cost of capital, as did the sky-high interest rates brought about by former Federal Reserve Board Chairman Paul A. Volcker's strict monetary policies.

These trends changed investment incentives, argues Gordon, by making the price of labor cheap relative to the price of capital. So employers hired more workers, creating an employment explosion through the 1980s. At the same time, capital investment slumped because it was more expensive. The outcome: The economy had more workers on the job for each unit of capital, which in turn slowed productivity growth.

CHARGE AHEAD. Today, labor costs are abnormally low by historical standards. And at about 4%, real long-term interest rates are the highest in 60 years, except for the 1980s. If the Fed remains hands-off and wages keep rising, investing in capital improvements would become more attractive than buying more labor. "If the real cost of labor rises relative to the real cost of capital, it should spur productivity over the long run," says NationsBank's Levy. That could pay for more wage gains without inflation.

Somehow, the U.S. has to keep the economic engine humming so Americans at every level can share in its remarkable wealth-generating power. It has come this far, hiccuping and coughing its way at times, charging ahead at other times, as it is now. Understandably, the Fed and the bond market are mindful of a roaring economy, given the pounding asset-holders suffered in the inflation-prone 1970s. But today's growth occurs in very different circumstances.

The U.S. economy isn't yet close to the level of the '60s, when Americans made unprecedented gains. It stands a chance of entering a golden age again--but it has to keep growing.

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