T he Labor Department reports hourly wages have risen just over 3 percent in the past year. But a closer look reveals that, deducting for inflation, the real growth rate of about 1 percent is the average for the past 20 years. And the national output of goods and services grew more than twice a fast as wages over this period. That is a major problem.
The nation’s sluggish wage growth remains a 45-year-old puzzle and a social concern. A recent study by the Economic Policy Institute found that between 1948 and 1973 wages largely kept pace with the growth in output. Unfortunately, since then wages have steadily fallen behind output.
For example, in the earlier period productivity rose 95.7 percent while the average wage grew 90.9 percent. But from 1973 to 2017, productivity grew 77 percent while wages grew only 12.4 percent.
During the latter period the labor share of gross domestic product fell from 64 percent to between 56 and 58 percent, a significant decline indicating a larger role for capital investment in national output.
The Congressional Budget Office this year estimated that between 1979 and 2014, incomes for the middle 40 percent of the population grew at only 1 percent a year, while incomes for the top 1 percent, who are largely involved in investing and managing money, grew nearly 2.5 times faster.
It is going to take a structural reform of the economy to redirect its benefits in a more equitable direction for American workers.
What kind of reform is perhaps the key political question of the times. One view calls for higher taxes on the wealthy, with the government redistributing the revenue to those with lower incomes. A version of this approach is already in place. Americans at the top of the income ladder pay a disproportionally large share of their income in taxes, and government benefits already provide the poor and “near poor” with various kinds of transfer benefits that substantially increase their disposable income.
There are, however, some obvious limits to going farther down this road. The government already runs a deficit to finance existing transfers, and government debt is approaching a level that some studies indicate will inhibit future economic growth.
The opposite view calls for reducing the government burden and giving the private sector more space to innovate, arguing that a rising tide lifts all boats. President Donald Trump’s tax cuts and red tape-cutting policies are examples of this approach in action.
It is fair to say that at least since the 1940s U.S. government economic policy has moved back and forth between these two poles. That has not stopped wage stagnation from occurring at all levels below the highest incomes. Something else is needed to increase the very modest economic rewards to labor as outsize rewards flow to the owners of capital. Paradoxically, higher interest rates controlled by the Federal Reserve Board — another government intervention — could be a first step in the right direction by reducing the rewards for pursuing risky but highly profitable financial deals.
The column from Bloomberg Opinion’s Noah Smith on our Commentary page today points to another related issue — stagnant productivity. According to figures supplied by the Economic Policy Institute, from 1948 to 1973 productivity per hour worked grew 2.7 percent a year. Since then it has averaged 1.3 percent a year. The cure, Mr. Smith argues, requires careful deregulation of excessive obstacles to job creation at all levels of government.
The issues of unfair foreign competition and uncontrolled immigration are also part of the problem. Solving these issues must be part of the solution. It is time both political parties found a way to cooperate on removing the impediments holding back the economy and wages.