The Obama legacy on wages

The closing days of the Obama years give us a chance to assess the president and his administration across a range of issues. Given that we at EPI have repeatedly called broad-based wage growth the central economic challenge of our time, it seems appropriate for to assess the administration’s performance in pushing policies to generate this growth.

We have generally organized the policies that would boost wages for most workers into three broad buckets: generating full employment and a “high-pressure” labor market, supporting or creating institutions and standards that boost workers’ bargaining power, and providing a countervailing force against the power of the top 1 percent to claim excess shares of economic growth.

Economic and political context

Before we assess the Obama administration along the key dimensions highlighted above, it’s crucial to provide the larger economic and political context of the past eight years. Even if an administration did everything right on policy efforts to boost wages, wages still might not rise if the overall economy was damaged when the incoming administration inherited it. This is clearly the case for the Obama administration. In February 2009, the first full month of the Obama administration, the economy had been in recession for 13 months, and the severity of the economic crisis was accelerating. In the six months ending in February 2009, the economy lost 650,000 jobs each month on average.

In short, the Obama administration inherited the worst economic crisis since the Great Depression. Even if it had been the most effective and wage-focused administration in history, the actual performance of wage growth over the following years would have still likely been sub-par.

The political context is equally important. A concrete example makes the point best: while the administration inherited a horrible recession, the recovery from the recession, even years and years after it ended, was historically slow. How much of this is the fault of the administration? Not much. The cause of the agonizingly slow recovery is clear as day: fiscal austerity at all levels of government. This austerity was the result of state-level decisions that were out of the administration’s hands, as well as demands for steep spending cuts issued by congressional Republicans as a condition for increasing the nation’s statutory debt ceiling in the summer of 2011. The annual budget proposals issued by the Obama administration routinely called for far more fiscal stimulus than a Republican-controlled Congress ever ended up passing. Could the administration have played the politics better and gotten different policy outcomes? Possibly. But, their publicly-stated policy preference (more fiscal support for recovery) would have worked, and that’s what they should get credit or blame for.

Securing full employment and a “high-pressure” labor market

Probably the most important ingredient for boosting low and moderate workers’ bargaining power and ability to realize wage gains is a tight labor market, where employers have to go begging for workers rather than workers begging for jobs. We never achieved this high-pressure labor market during the Obama administration—even as recovery has been remarkably consistent, and even as unemployment was cut in half between the peak levels it hit during the recession and the end of Obama’s term. This failure to rapidly return the economy to full employment is by far the most important reason why actual wage trends have been disappointing.

But Obama’s policy record on this front is pretty good. The first major act of the administration was shepherding the American Recovery and Reinvestment Act (ARRA) through the legislative process. ARRA created or saved roughly 2-4 million jobs and kept the economy from falling deeper into recession. After ARRA’s spending support expired, the administration kept looking for opportunities to secure more ad hoc fiscal stimulus even with a largely hostile Congress. For example, the administration agreed to delay the expiration of Bush-era tax cuts in exchange for additional stimulus at the end of 2010, and consistently argued for sustaining extensions in the duration of unemployment insurance (UI). These ad hoc measures were not trivial. By the summer of 2011, however, the spending cuts forced through by Republicans as the price to raise the nation’s statutory debt ceiling put fiscal support for economic recovery into hard reverse.

I wish the administration had been consistently strong and forceful in making the case that more fiscal support was needed. Their support wavered as they sought to placate misguided deficit hawks in 2010. And once it became clear that the post-2010 Republican-led Congress would not pass any more fiscal support, Obama still should have called for it—at the least to educate voters as to why economic recovery was so slow. But these are quibbles. the failure to reach full employment by the end of the Obama administration is largely not his fault.

Boosting and building institutions and standards to support workers’ bargaining power

Of course, American workers should not have to wait until the economy is at genuine full employment to ever have any hope of raises. We have institutions and standards that give working people the bargaining power to achieve wage gains even when the economy is not roaring. But these institutions and standards have been intentionally undermined by policymakers looking to redistribute income upwards, and new ones have not been built at any scale to take their place.

The two most important of these institutions are legislated minimum wages and unions. The federal minimum wage last saw an increase in 2009, but by 2010, Congress was controlled by Republicans, so proposals that the administration backed that would have increased the federal minimum wage were not passed. The administration did, however, use its regulatory power over federal contractors to mandate that these employers pay at least $10.10 an hour. The administration also mandated that these employers provide paid sick leave, refrain from discrimination based on sexual orientation or gender identity, and offer pay transparency as a measure to combat discrimination in wage-setting.

Early in the administration’s tenure, Congress failed to pass the Employee Free Choice Act (EFCA), a reform to labor law that aimed to re-level the playing field between workers who want to organize a union and employers that want to stop this. EFCA had the backing of the administration and almost surely the majority of Congress before 2010 when Democrats controlled both chambers. It did not, however, have a filibuster-proof 60 votes in the Senate, so it did not become law.

Much like the minimum wage, the administration did use tools it did have control over to back workers attempting to form unions. For example, the National Labor Relations Board (NLRB) issued rules that eliminated delays in union representation elections, cutting down on opportunities for employers to engage in anti-union campaigns. The result was a significant increase in union win rates. It also extended employee rights to engage in collective action via social media, and ruled that some large corporations should not be able to escape their obligations as employers by franchising or contracting out.

In recent years, the Obama administration Department of Labor (DOL) issued a number of rules that effectively boosted the bargaining power of low- and middle-wage workers. The most prominent is the rule on overtime pay, which boosted the number of salaried workers who would automatically receive overtime pay based on a straightforward salary threshold by roughly 12 million. DOL also issued conflict-of-interest rules mandating that retirement advisors offering guidance to workers through employer-sponsored 401(k) plans must adopt a stringent “fiduciary standard,” which mandates that advice given to workers must aim to maximize the returns to workers. Currently, these advisors far too often steer workers’ savings into financial vehicles that provide large fees to themselves, rather than high and stable returns to their worker advisees.

The Obama administration’s record on boosting and building institutions to give low- and middle-wage workers bargaining power is strong overall. It backed most legislative efforts in this regard, and when legislation was stymied, the Labor Department showed energy and creativity and commitment to maximize the effectiveness of its tools to give American wages a boost. In the spirit of fairness, however, the administration does deserve to be dinged for supporting trade agreements that would have amplified the drag globalization has put on wages for most Americans. They are lucky that the most ambitious of these agreements (the Trans-Pacific Partnership) did not come to pass— it certainly would not have been good for wage growth.

Providing a countervailing force to restrain the economic power of the top 1 percent

Too often, boosting pay for low- and middle-wage workers is assumed to be unrelated to the stratospheric income growth of the top 1 percent. This assumption is wrong—these issues are absolutely related. The past generation of American economic life has been largely zero-sum, so any effort to achieve more rapid wage and income growth at the bottom and middle would almost surely have to be accompanied by efforts to restrain the share of income growth claimed by the very top.

Given the very short time that the Obama administration had with a Democratically-controlled Congress, its legacy in this area is surprisingly robust in some ways. A key plank in the agenda to restrain the economic power of the top 1 percent is higher top marginal tax rates. These higher rates do not just provide revenue for federal spending that can boost living standards at the bottom and middle, they also blunt the incentive for powerful economic actors to rig the rules of the economic game to claim ever-larger shares of income. The Obama administration let the Bush tax cut expire, returning top tax rates on ordinary income to Clinton-era levels.

Also, the Affordable Care Act included a surcharge on high incomes and extended the tax that funds Medicare to unearned income (income that accrues to people not because of work, but because of ownership of capital) above high thresholds. These are highly progressive changes. In 2013, the effective income tax rate on the top 1 percent was higher than at any time since 1997.

Another key plank in the agenda to restrain the economic power of the top 1 percent is regulating the finance industry. A huge share of top 1 percent incomes is gained in the financial sector, and yet much of what leads to income accruing in that sector does not boost wider economic growth. Dodd-Frank—and the resulting rulemaking in subsequent years to implement it—is quite promising in regards to how much they’ve restrained this sector, mostly by reducing how much risk financial institutions can take on The full test of this check on finance’s power will come over time. Regulation of powerful industries and sectors is never a one-shot affair—it’s a constantly-evolving game that regulators have to be nimble and tough-minded in playing. But the game at least began in the Obama administration.

To be clear, the administration has not solved all—probably not even most—of the problems associated with an inefficient and bloated financial sector. Outright fraud persists in this sector alongside waste. But Obama took a major step forward relative to what he inherited. If there is a particular disappointment, it’s that the administration never got on board with ideas to impose a modest financial transactions tax on finance, which would have helped solve many of these problems.

Besides finance, the biggest portion of growth in the top 1 percent is skyrocketing pay of corporate executive and managers. Part of Dodd-Frank at least required some transparency in this pay explosion, mandating that some firms report the ratio of CEO pay to pay of typical workers. While firms continue to fight this rule and final implementation has not happened yet, this transparency will be welcome, if not transformative.

Summing-up

Simply put, the Obama policy record on wages is strong. But the actual performance of wages over his tenure was extraordinarily weak, because the economy he inherited was a disaster and recovery efforts as well as useful wage-specific initiatives were thwarted by other policymakers.

It is a shame that the effectiveness of President Obama’s policy agenda on wages was so severely hamstrung by economic circumstances and political opposition. The lesson to be learned, however, is not to abandon the wage-boosting agenda. Instead, the lesson is that there is a political benefit for policymakers who embrace an agenda that would actually support wage-growth and who manage to pass it during a time of economic strength. The details of policy may be lost on many voters, but actual wage growth and economic security would not be.


  • John

    Pres Obama successfully pushed through KORUS trade agreement with Korea – a detriment to wage growth. Also, a top priority for his admin to the end was TPP and TTIP – trade agreements to further depress American wages. Initiatives to boost wages was a facade to make it appear action was in the works but bad actors blocked progess – all carefully staged.

    Pres Obama’s record on zero wage growth is his alone.

  • FdoCenteno

    As one who has wkd in the CED over 20 yrs, what I don’t understand is why there isn’t an established protocol to assess & evaluate private sector beneficiaries of public dollars (carried out in the name of “economic development”) as per broad wage growth, family leave, child care, sick leave, benefits to low-moderate income workers?

    My city ranks No. 4 in “economic segregation”, yet it spends tens of millions in public funds to private businesses to “expand growth” & the built environment, yet we see widening S-E disparities & concentrated poverty?
    In this regard, public sector planners & mgt officials are weak in their role to account for poor results by investing in the private sector. Pls tell me I’m wrong & everyone is doing a great job of it . . .

  • Rogan Thompquist

    “The Obama Legacy on Wages,” by Josh Bivens, did a good job supporting Obama’s record promoting labor on domestic economic issues, but didn’t put enough emphasis on the very poor trade policy that Obama made worse. Giving millions of jobs to China may have had great benefits for global corporations, their CEO’s and stockholders, but it undermined the labor market. It also contributed to national debt, providing a political tool for the right wing.

    Obama’s support of the neocon “free trade policy” that rewarded the 1% and hurt workers, is a major part of his legacy. Without strong moves to balance trade we are never likely to see a “high pressure labor market” that Bivens advocates. EPI has provided leadership in bringing these issues out. EPI has shown where deficits in international trade corresponded to weakening of US labor earnings and rewards for the 1%. And Bivens recognizes the need for financial reform, where Obama should have shown greater leadership.

    It is good to evaluate Obama’s positive contributions to labor, but we don’t have to take an apologist position and deemphasize Obama’s failures. We need to move forward.
    Thank you, Rogan Thompquist

  • Obama was a good president.