Only Large Scale Public Investments Can Generate Wage Growth By Lowering Unemployment

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[The Economy]

The president did a great job framing the economic problems we face, providing a narrative on what’s happened to the broad middle class, saying "a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.”

And then he got to the core issue: “The link between higher productivity and people’s wages and salaries was severed—the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

Couldn’t have said it better, though my colleagues and I have tried many times, (here on the productivity-wage divergence and here on the top one percent).

The question I want to raise is whether the solutions being discussed are of sufficient breadth and scale to overcome the forces driving the dismal outcomes just delineated. Let me identify some issues that stand out for me.

The president makes the appropriate case for public investments in infrastructure, in clean energy and in education. In fact, these investments are critical to our future growth. But he shouldn’t pretend that there will be anything but disinvestment in the future, as overall spending on domestic programs will be reduced by at least a fifth over the next ten years, even if the sequester is reversed.

Looking specifically at public investments, Obama’s FY14 budget had nondefense public investment fall to 1.7% of GDP in 2023—the lowest since 1947—from 2.7% in 2008. And, we’ll never raise the revenues we need for these and other investments if we brag about “locking in tax cuts for 98% of Americans,” as the president did.

Likewise, the president talks much about providing “an education that prepares our children and our workers for the global competition they’ll face,” including providing greater access to higher education. I couldn’t be more supportive of these efforts because they will help fuel growth and improve social mobility, facilitating access to better jobs for low and middle income students.

However, these investments in our workforce do not address the fundamental wage problems evident in America these days. As I noted on Tuesday, “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.” That is, college graduates have now joined low and middle wage workers in the group that does not see any improvements in wages and benefits as the economy grows. Sending more people to college won’t change that.

The president did put forward a higher minimum wage, much to his credit. Raising it to the level of the early 1980s and indexing it to inflation, however, is a too modest goal. Today’s low-wage workers are far more educated and productive than they were back then and lots of indicators suggest the minimum wage should be much higher, as my colleagues illustrated with some great infographics.

As I noted before the speech, “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.” That’s a conversation this nation needs to have. Workers are clamoring for decent wages across the country, as witnessed by the fast food worker demonstrations and strikes. Add the Walmart workers to the picture, too. Obtaining equitable wage growth that keeps pace with productivity will take a sustained, aggressive effort, as noted in my preview to this speech:

“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 worker’s 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.”

 

The Economic Policy Institute (EPI) is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States.

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