Is the supposed wage stagnation something to worry about?

Is the disparity between wage growth and economic growth really something to fret about?

In a brief essay, cited by the St. Louis Fed, YiLi Chien and Maria A. Arias, discuss how wage growth has lagged behind economic growth for several decades now and that even the cyclical component of wage isn’t in the mix.

This is not something economists really disagree on. The argument dives into a discussion of magnitudes. Similar to the debate on minimum wage, no one argues if minimum wage actually negatively affects employment, but by how much. How much does it affect employment and do the positive effects outweigh the negative effects?

Robert Reich argues that in keeping with inflation, the minimum wage would be well past $10 per hour and if we account for productivity increases, wages should be around $15! Additionally, he argues a mandated increase in the minimum wage is “not only economic thing to do, but the right thing to do.” The gains of people being lifted out of poverty will be larger than the costs of people losing their job. Hard to believe, but we’ll roll with it.  

In the paper, “Inequality, Mobility, and Being Poor in America” by Professor Steven Horwitz, a more nuanced discussion on inequality is presented. He argues that even though wages and household income has slowed considerably since the 1970s, those “wages buy a lot more than they used to.”

He lists items ranging from a washing and drying machines to computers and cars, and the percentages of poor people that owned these items from 1971 to 2005. For example, only 44 percent of poor people owned a clothes dryer in 1971. In 2005, that number increased to 81 percent. Air conditioners, color TVs, stoves and refrigerators had large increases as well. Other items like computers, VCRs, and cellphones didn’t even exist, yet at least 67 percent of poor people in America owned these things.

Despite wages slowing down, the economic growth has actually stabilized our well-being by making goods cheaper. Cheaper due to people being more productive with the help of technology and automation, global competition, and arguably the slowed wage growth.

productivity-growth

In manufacturing, productivity levels have skyrocketed in the last few decades. Durable goods, or goods that can be used for a long period of time like motor vehicle parts, computers, metals, etc., have seen a positive trend for at least three decades. Would I be able to purchase a Chromebook for $150 if wages were to keep up with these productivity levels? Would household items like air conditioning/heating, washer and dryer, and microwave, that arguably save lives be as affordable had we forced wages to keep up with productivity?

Many folks in manufacturing have lost their jobs. Lower-end gigs are starting to displace workers by automating the services provided. This automation will continue to disrupt the labor force in ways that can be very painful for some. It will have us look to the rich, funding these disruptions, to do something about it; to cover the social costs of bringing in disruptive technology into their firms.

However, before we start forcing them to give up their profits that often motivate them to continue with these disruptions, we should sit back for a second and look at all the neat items that were once out of reach that have now become integral parts of our lives. Things that were once solely for the rich have now become easily accessible to most of the population and much of the very poor world.

In Sub-Saharan Africa, the cell phone and internet has revolutionized their financial markets and banking, allowing people to move around money without the need of a financial planner or formal banker. This undoubtedly lifts the well-being and quality of life of people. The sharing economy, has offered opportunities for millions of people to not only make extra money but to have access to services that were once too expensive or prohibited without proper licensing.

We will always be relatively unhappy, thinking we have received the short-end of the stick—that’s just human nature. To be sure, there is much to do in the effort of alleviating poverty, addressing income mobility, and creating the institutions that allow the free exchange of goods, services, people, and information. Wages may or may not be part of the answer. But, despite our wages not keeping up with productivity and economic growth, today, we are the richest we’ve ever been.

 

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