The Case of the Missing Middle Class Wages

Hey, where’s that rich guy running with our paychecks?

Nobody reads Politico to discover something new. Campaign staff and their consultants read Politico in order to gauge how their latest spin played out in the DC Beltway. Celebrity politicians check Politico to make sure they’re mentioned. The media reads Politico to see what the dominant narrative for the day will be.

Every so often, Politico will break some news, or publish an editorial that reframes a debate. But the day-to-day grind of Politico—its bread and butter—is regurgitating known knowns for the DC crowd. It’s the outlet for pushers of conventional wisdom to promote and bolster conventional wisdom for other pushers of conventional wisdom.

All this brings us to a story by Danny Vinik titled “The economy keeps improving. Why aren’t wages?” Here’s the nut of the problem, as Vinik sees it:

Wages have grown just 2.5 percent over the past year, only slightly higher than inflation. Since 2010, nominal wages have grown about 2.5 percent each year, while inflation has averaged 2 percent. Perhaps most concerning, as the labor market has tightened, wage growth hasn’t accelerated.

Vinik talks to some economists who have “a few theories” about why wage growth hasn’t happened, and he boils their theories down to three main hypotheses:

  1. The economy still isn’t at full employment”
  2. Workers aren’t becoming more productive”
  3. Industries are too concentrated”

Let’s just say up front here: the conventional wisdom isn’t really interested in solving this problem. The conventional wisdom is interested in paying lip service to the problem while ensuring the status quo. And so of these three theories, two are completely wrong and one barely lands a glancing blow on the real problem. So let’s talk about the wrong theories first.

Full employment” is an economic term that gets pointed to a whole lot at moments like this where unemployment stats sink to a fairly low point. Basically what Vinik is arguing here is that the market should raise wages naturally when enough workers enter the job market.

So if this theory is correct, why isn’t the Invisible Hand—hallowed be its name—raising wages? Well, mainstream economists argue, it’s because there still aren’t enough workers in the job market. How many workers need to be in the job market for wages to start climbing? Unclear! And what could coerce the Invisible Hand into action? Tax cuts are one theory that Vinik floats, and we’ll come back to that after we look at the second and third items on his list.

So moving on: are workers not productive enough? “Traditional economic theory holds that workers’ wages will rise in line with productivity growth,” Vinik writes. He says that “as they become more productive, workers become more valuable to companies and can demand a raise.” Again, presumably, the Invisible Hand—praise be unto it!—would make this happen.

Except worker productivity has risen dramatically since the 1970s, and wages have stayed flat. A 2012 study showed that the minimum wage would have hit over 21 dollars per hour in 2012, had wages and productivity stayed tied together. They did not, and our national minimum wage is still $7.25, just as it was in 2012.

So that brings us to the third and final option on Vinik’s list. Are monopolies to blame? “In a world where workers can’t simply switch to a new industry — gaining new skills takes time, for instance — workers have little power to demand a pay raise,” he warns.

Which, okay. Yes, that’s a valid point. But throughout this post, Vinik ignores the easiest explanation for all this: Workers aren’t earning more because employers aren’t paying them more.

Simple? Yes. True? Also yes. And here’s another condition that Vinik doesn’t really examine: Union membership in the United States has precipitously declined since an all-time high in the 1950s, and without that collective bargaining power, individual Americans can’t successfully negotiate for better wages. Here’s a fun fact: the word “union” doesn’t appear in the piece at all.

You know what other word doesn’t appear in the piece? “Profits.” Here’s the St. Louis Fed’s chart of after-tax corporate profits:

That money is not going to wages. No mythical Invisible Hand is sweeping down from the heavens to redirect those profits into worker paychecks. That’s where the money has gone. That’s money that should belong in the pockets of workers. Instead, it’s going toward the top one percent.

Vinik should get credit for at least asking the right questions in his piece. Even promoters of the conventional wisdom can’t ignore the fact that wages are artificially low. But the simplest explanation is right in front of them. Those wages didn’t disappear. They aren’t being withheld by a mysterious Invisible Hand. They’ve just been funneled into the top one percent.

Yet corporate interests keep urging reporters like Vinik and politicians like President Trump and Speaker Ryan to promote tax cuts for the wealthy and deregulation for corporations as solutions to this problem. This is almost exactly like asking fire departments to put out house fires with gasoline. So many of America’s current problems—the sluggish recovery, the stagnation of rural areas, the lack of revenue to fund education and other essential government funds—can be traced directly to the inequality created by the working class’s missing wages.

If we were to raise the wage and ensure that middle class policies like a decent overtime threshold were in place, those profits would go to the middle class. Those people would then spend those profits on goods and services in their community, they’d invest them in education and nonprofits, they’d start their own small businesses. Everyone would be better off.

But as long as the conventional wisdom continues to serve the interests of the wealthy at the expense of ordinary Americans, you’re not going to see the obvious truth in Politico. What happens if this situation continues—if the wealthy continue to keep a grossly disproportionate share of profits that belong to 99 percent of all Americans? The answer to that question, funnily enough, can be found in an essay written by Nick Hanauer that was published in Politico about three years ago: “The Pitchforks Are Coming…for Us Plutocrats.”

Paul Constant

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