President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage Growth
Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.
Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.
The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.
To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction (which under current conditions will sap demand for goods and services and slow job growth). This means an aggressive increase in the minimum wage that eventually grows to half of the average workers’ wage. It means reestablishing the right to collective bargaining for higher wages and addressing workplace concerns. It means not allowing guest workers to undercut wages in both high-wage and low-wage occupations, which can be done by giving full rights to any ‘guests’ and by scaling such programs to the limited situations for which they are needed. It means taking executive action to ensure that federal dollars are not spent employing people in poverty-level wage jobs. Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority.
If we choose not to take this path, we will fail to achieve shared prosperity and return to relying on debt and asset bubbles to fuel growth. I have seen that movie already, and I didn’t enjoy it.
Hope and Cash, Investment and Policy: Jeep and the Future of Detroit
I just finished complaining in an earlier blog that the media wasn’t telling enough manufacturing and supply chain stories when Bill Vlasic proved me wrong with his piece on Chryslers’ Jefferson North Assembly Plant in Detroit: Last Car Plant Brings Detroit Hope and Cash.
Only two days later, the City of Detroit filed for the nation’s largest ever municipal bankruptcy. “Hope and cash” suddenly sounded like too little too late. It’s not. In fact, the story suggests what it takes to make recovery work.
We can all picture a Jeep. But Vlasic’s piece gives the new Jeep Grand Cherokee a powerful backstory:
“There is a section of Detroit’s east side that sums up the city’s decline, a grim landscape of boarded-up stores, abandoned homes and empty lots that stretch all the way to the river.
And in the middle of it stands one of the most modern and successful auto plants in the world.”
The article paints a picture of today’s high-quality, high-tech manufacturing that can’t be underscored enough: making 300,000 vehicles a year with $2B a year in profit, the unionized Detroit facility is “on par with the most efficient luxury car plants in Germany and the best factories operated by Japanese automakers in the southern United States.” It’s a positive story for the auto industry and for Detroit: jobs at the plant have more than tripled, from 1,300 to 4,600, a third of employees live in the city, and its property taxes send $12 million a year to the city coffers.
Calling it the “last car plant” in Detroit is a bit misleading, however. Not only is GM’s Hamtramck facility arguably within the city limits, as are two engine plants, but from an industrial perspective, Chrysler’s plant is hardly alone. It is part of a huge cluster of automotive parts and assembly facilities in the greater Detroit area that still make up a significant share of US manufacturing output. If we’re going to bridge the gap between the auto industry’s recovery and Detroit’s, it would be more helpful to think of Jefferson North as a leader in a new generation.
Of Final Candidates, Yellen Should Be Next Fed Chair
The choice for Ben Bernanke’s replacement as the next Chair of the Federal Reserve seems, in DC’s conventional wisdom, to have come down to Janet Yellen (Bernanke’s current deputy) or Larry Summers (a former official in both the Clinton and Obama administrations, including a stint as Treasury Secretary).
For those who think that the U.S. economy remains too weak and needs as much policy support as it can get, this seems like a pretty good choice. Both Summers and Yellen have consistently argued in the past couple of years that the primary problem facing the U.S. economy currently is slack demand.
I’d argue, however, that Yellen is the clearly correct choice for the job right now.
For one, she has been far ahead of the policymakers’ curve when it comes to diagnosing macroeconomic trouble. Recently released minutes from Federal Reserve Open Market Committee meetings in December 2007 show that Yellen was nearly alone in warning that a recession was imminent—a warning that proved correct.
The Compensation/Productivity Link Is Indeed Broken for the Vast Majority of American Workers
On Wednesday, Jim Tankersley reported on a new study from the Heritage Foundation claiming that the apparent broken link between wages and productivity is actually just a statistical artifact.
Most of the report simply notes that compensation, not just wages, matters to American workers, that productivity and wage (compensation) growth are often calculated using different price deflators, and that one should take depreciation into account while calculating productivity.
All these are fair enough as matters of arithmetic (though we may have more to say on our interpretation of these issues, which differs a lot from the Heritage report1), and we have generally taken these factors into account in our work showing the growing gap between wages and productivity (and so have other careful analysts). So what’s the big difference between our work and the Heritage report? It’s something they spend a lot less time on.
At EPI, we don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters; when, say, LeBron James walks into a bar average compensation rises a lot even though the compensation of the median person in the bar is likely unaffected.
So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation track productivity.
What We Read Today
There’s a heat wave in Washington this week. Here are some cool articles we read:
McDonald’s Employees Don’t Need Financial Planning, They Need Raises
McDonald’s recently partnered with Visa to put out what they call the Practical Money Skills Budget Journal (pdf), a “helpful” tool for McDonald’s employees to keep track of their earnings and expenses. There have been a flurry of responses to the “McBudget” including realistic comparisons, snarky analysis, and talk of unicorns as a means for transportation. Others have defended the budget, claiming that it gives low-wage workers the necessary tools for financial planning.
Coincidentally enough, we also recently released an online tool related to family budgets—along with Elise Gould and Nicholas Finio, we developed EPI’s Family Budget Calculator, a measure of just how much income it takes for families to buy the necessities for an adequate but modest lifestyle. Our basic budgets include the cost of rent, food, health care, child care, transportation, other necessary expenses and taxes in each of 615 communities across the country. While families at these budget levels may be able to pay their bills and put food on the table, our family budgets imply a pretty austere lifestyle. There is no savings, no vacations, no cable or internet service, and, certainly, no restaurant visits.
Prices Drop as the Affordable Care Act is Implemented
The health insurance premiums announced today for the new health insurance exchanges for New York were far lower than their current individual health insurance market. This is great news for the thousands of New Yorkers who will see their premiums fall, and for the many more thousands who will be able to find affordable coverage when they couldn’t before. This is a promising sign that the health insurance exchanges established in the Affordable Care Act (at least in states taking implementation seriously) could work as planned and improve the range of affordable choices available to consumers.
On the flip side, today, the US House of Representatives voted to postpone implementation of the individual mandate, the provision of the ACA that requires that Americans are covered by health insurance, even if they have to buy their own. Postponing this provision would be a huge mistake.
A key feature of the ACA is that it requires that insurers offer coverage to everybody, and at a common price (subject to some variation based on age and whether or not you’re a smoker). If these requirements existed without a provision to stop free-riding (the individual mandate), too many healthy people would wait until they got sick before they enrolled in insurance and started paying premiums. This means that the insurance pool at any point in time would be less healthy, and thus more expensive, than it would be under the mandate. Simply put, the individual mandate makes health reform considerably more efficient.
Immigration Legislation Would Improve the Labor Market by Protecting Undocumented Workers from Employer Retaliation
A disturbing report in the Huffington Post serves to remind us what abuse and exploitation of undocumented immigrant workers looks like in the U.S. labor market. Antonio Vanegas, an undocumented immigrant worker who complained to the Department of Labor (DOL) and spoke out publicly by testifying to the Congressional Progressive Caucus about alleged wage and hour violations committed by his employer, Quick Pita (in Reagan National Airport), soon thereafter found himself in detention and deportation proceedings. And this happened despite the fact that DOL agreed to investigate Quick Pita based on Vanegas’s claims that he was earning $6.50 an hour (the local minimum wage is $8.25) and working 60 hours per week without being paid for overtime. Occurrences like these are probably not uncommon and are a legitimate reason for all U.S. workers to be concerned. If S.744, the comprehensive immigration reform legislation passed by the Senate, becomes law, some of the bill’s provisions would protect vulnerable undocumented workers like Vanegas and improve the labor market for American workers too.
The situation Vanegas found himself in illustrates how employers use the immigration status of undocumented workers to keep them from demanding that their employers obey the law or from engaging in union organizing activities. As cases in the past have demonstrated, however illegal its own conduct might be, an employer can simply fire an undocumented worker without justification and without worrying about being held accountable for retaliating or other legal violations, or for paying back wages. Or an employer can fire undocumented workers as the result of a “self-audit” of the company’s employment records, or after inviting the government’s immigration authorities to conduct an audit. Ultimately, the undocumented worker is terminated, deported, or both, and has limited access to legal remedies. Although ironically Vanegas worked for years in a building that also houses the Department of Homeland Security’s immigration authorities, he never had a problem until he advocated that his employer comply with the law. Almost immediately after that, he was put in a cage for four days and subjected to deportation proceedings.
Scapegoating the NLRB
Yesterday, it appeared that the Senate was on the verge of “going nuclear”—amending its rules mid-session to prevent the use of filibusters to block the president’s appointment of executive branch officials. The use of parliamentary tactics by a minority of senators to prevent the popularly elected President of the United States from appointing the heads of agencies that enforce key laws has reached unprecedented levels and threatens the ability of the president to govern. The Senate has been in gridlock ever since President Obama was re-elected. A concerted effort by Republican senators has prevented the passage of key legislation, blocked confirmation of federal appeals court judges, and blocked confirmation of President Obama’s nominees for Secretary of Labor, Administrator of the Environmental Protection Agency, Director of the Consumer Financial Protection Board, or any of the five nominees to the National Labor Relations Board (NLRB).
Today, it appears that a compromise has been reached that will allow the president most of his appointees, but not all. The Senate’s compromise forces the president to choose new nominees for the NLRB.
What We Read Today
Happy Friday! Here’s a bit of what we read this week:
- The generation we love to dump on (CNN)
- You’ve Been Warned (New York Times)
- Sequestration Pushes Head Start Families To The Precipice (Huffington Post)