Wage Decline: No Mystery Whatsoever

Real wage decline has been described as a mystery by many financial analysts. In fact, there's no mystery whatsoever. Current real wage decline is the result of some basic economic factors. The apparent "mystery" is caused by the miscalculation and misapplication of these factors in today's economy. The 1st first factor is the miscalculation of unemployment which distorts true labor force size. This distorts the true supply and demand factors. The 2nd factor is the overestimation of the "sticky wage" effect on today's employment picture.

The calculated unemployment has been kept lower than its true number by statistical chicanery. Under Bush a much greater number of unemployed workers have been re-classified as "not in the labor force." As such, they are not counted as unemployed and their exclusion greatly reduces the alleged unemployment rate. This number has grown twice as fast during Bush's 5 years as it did during Clinton's last 5 years.

More specifically, since Bush took office the number of working age workers "not in the labor force" has increased 7 million. This is in contrast to an increase of only 3.5 million during Clinton's last 5 years. Had the number of workers "not in the labor force" increased at the same rate as they had under Clinton, the true number of unemployed workers would be 10.5 million, instead of 7 million as the Bush administration claims. This increase would result in an unemployment rate of 7.3%, not 5.0% as is currently claimed. (The unemployment rate of 5.0% comes from dividing the alleged 7 million unemployed workers by the total number in the "participating" labor force of 141 million. If 3.5 million more workers are added to the unemployment number, the number of unemployed becomes 10.5 million. Dividing 10.5 million by 144.5 million {141+3.5} gives an unemployment rate of 7.3%)

Below is a chart of the "Not in the Labor Force" numbers.


The Bureau of Labor Statistics link for the "Not in the Labor Force" figures can be found at: BLS


The number of the working age population considered "not in the labor" has increased almost twice as fast as the population growth, as well as the growth of potential workers. The total population increase per year is approximately 1.1%. The same is true for the anticipated growth of the working age population. The same increase would also be expected in the growth of the "participating" labor force. Thus in 5 years the labor force should increase about 5.5%. And those not in the labor force should increase by the same amount.

This was exactly the case during Clinton's last 5 years. During that time, the population considered "not in the labor force" increased from 66.997 million to 70.488 million, or roughly 5.5%. In contrast, the increase in those "not in the labor force" under Bush increased from 70.488 million to 77.028 million, or about 10%. As such, the number of the working age population that allegedly dropped out of the work force under Bush was double that of Clinton's last 5 years. Does this really make any sense, if an economy is "strong, and getting stronger"? Should more people actually be dropping out of the work force?

Obviously a larger pool of workers drives wages down, as an increased "supply" of anything drives "prices" downward. In this case, the "price" is workers' wages. If the increase in workers seeking employment exceeds job growth it puts downward pressure on wages. This is exactly what's happened under Bush. Jobs have been created at a MUCH slower rate than the increase in the size of the labor force. The exclusion of 3.5 million truly unemployed workers from the reported unemployment number has made the calculated unemployment rate deceptively low. This deception has obscured the major source of wage stagnation -- the "supply" of workers is increasing faster than the "demand" for workers.

The effect of "sticky wages" has also been overstated. The general theory is that wages will not decline as fast as the true demand for workers declines. This is attributed to a number of factors, such as labor contracts, unwillingness of workers to accept wage cuts, and unwillingness of employers to risk losing current employees. However, there are a number of reasons why this has less application than previously.

There has been a much greater rate of job turnover than in the past. This causes many employees to be new hires. New hires have much less wage-bargaining power than long-term employees. Simply shifting the balance of employees from long-term hires to new hires reduces the "sticky wage" effect.

There has been a tremendous decline in the influence of labor unions, and their ability to negotiate wage increases for their members. A much smaller percentage of workers are unionized than in the past. In addition, many companies have successfully negotiated wage or benefit reductions with their current employees. This is something that was extremely rare in the past, but has become quite common today. Further bolstering businesses ability to reduce wages is the constant threat of bankruptcy of many businesses, and the complete loss of income if workers don't accept pay cuts.

The threat of job loss to foreign workers has also driven wages downward. Though employers may not directly threaten employees with the outsourcing of their jobs, the implied threat is always present. It has become apparent to most American workers that almost any job can be outsourced, and that workers had better not "price themselves out of the market," and make their company "less competitive." Many workers are completely aware of the ongoing effects of NAFTA and the anticipated effects of CAFTA. Workers are simply tolerating wage reductions at present, when they never would have done so in the past.

Thus, the increased supply of workers to jobs and the diminished effect of "sticky wages" has resulted in real wage decline. There is no mystery here. Wage decline has been caused by simple labor supply & demand effects, coupled with a reduced "sticky wage" effect.



unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

Who don't receive the amount they are listed as being paid, since the temp agency gets a handsome percentage. I have seen this technique used to great effect by companies like Dell.

You're absolutely right. And temps alway get paid less than regular employees. And they can be terminated immediately. And companies know that temporary workers are desperate for work, and take full advantage of that when paying them.

Companies would MUCH rather hire temporary workers than permanent workers. They don't have to pay them for any extra time that they don't need them for.

This helps them keep their work force "lean and mean." (With special emphasis on "mean.")

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

Workers who have been unemployed for extended periods have been forced to take much lower paying jobs than they held previously. i know a great many of these "underemployed" people, who have taken part time and/or minumum wage jobs to attempt to meet their bills, rather than wait for a true career job.

Many Americans careers are in a holding pattern.

Healthcare coverage
401(k)/pensions

That's exactly right. That's part of the reason the "sticky wage" concept doesn't apply here. With so many underemployed workers, and so much employee turnover, it allows employers to ratchet down wages more than in the past. This is happening in all non-management jobs throughout the wage spectrum. H1B Visa holders are being hired to replace higher-wage American workers at the higher end of the wage spectrum, and illegal immigrants are being hired to replace American workers at the lower end of the spectrum. Every factor imaginable is pushing American workers' wages down.

will fight the supply shock that would otherwise happen due to rising oil prices. Workers are doing their part in spades.

What the hell are the rich sacrificing?

Good point. The rich are sacraficing nothing.

is as corporate managers and or in the stock market - how do they sacrifice? Nobody is asking them too.

Maybe the rich and corporate management could stop lobbying Congress to extend their tax cuts. I think a majority of Americans are asking them to give up their tax cuts, and stop spending every minute of their free time writing letters, lobbying, and concocting new reasons why their tax cuts are "good" for everyone else.

I think the rich have been asked to sacrifice, and they have militantly refused to do so. And their self-serving interests have been well represented in both houses of Congress, as demonstrated by the voting records of both the House and the Senate.

When you have to compete with "cheap labor" elsewhere, it's hard to negotiate well. And, it's no accident that we are in that position now, it is deliberate policy pursued for several decades.

It definitely reduces jobs in the United States when those jobs can be shipped overseas to a foreign labor market where workers will accept a fraction of the pay that American workers will.

It further reduces American employment by reducing aggregate American worker income. That reduced income reduces consumer spending, which reduces consumer production demand. This even further reduces the demand for American labor, thus reducing wages of American workers.

Right-Wing Corporatists claim the reduced labor costs are passed on to American consumers. This is a ridiculous argument, because if the entire reduction in labor costs was passed on to American consumers, there'd be no monetary motivation to outsource jobs. There'd be no increase in profits for the multinational corporations. And if the entire labor cost reduction is not passed on to American consumers and workers, then it is a net loss to American workers.

If corporations save $10/item on production costs by eliminating $10 of American labor income, and pass $5 on to American consumers, it is a net loss of $5 to American workers/consumers. If they passed on the entire $10 to American consumers, there'd be no outsourcing because there wouldn't be any labor cost reduction.

There is simply no way that outsourcing "helps" American workers. It only "helps" them become poorer.

consumers.

I'd love to compare retail prices charged by corporations before and after they outsourced their production.

I suspect that retail prices for most items do not drop very much at all and that almost all the benefits of outsourcing accumulate to corporate management and to the 1% of Americans who own 90% of corporate equity in America.

In other words, I suspect that globalization has concentrated wealth in fewer hands to such a degree that it vastly outweighs the benefits that Jeff Sachs argues it creates (developing world's worker's getting better-paying jobs). (Sachs should read The Health of Nations, which argues that sometimes, even if all boats are lifted by a rising tide, if the yachts are lifted much higher than then dingies, the harbor can be much much worse off.)

I doubt there's much true savings passed on to consumers. Items become cheaper to produce over time when they are mass produced. This concept is called "economies of scale." In other words, even if many foreign-made products (that were previously made in the U.S.) were still made in the U.S., the price would have declined anyway. So many of the "lower prices" attributed to outsourcing would have occurred anyway, due to "economies of scale."

I'm betting the unemployment rate is much higher than 7.3%. Personal guess it's more like 25%.

I suspect you're right, because those with part-time jobs that want full-time jobs are considered "employed," and therefore add to the employment number.

A previous article written by economist Katherine Bradbury of the Philadelphia Federal Reserve puts the number much higher as well, due the false inclusion of many non-full time workers.

I knew they had to have done something, I just couldn't find the exact chart to prove it.

Is there a chart showing home based workers as well, because I know they were classifying people as self-employed when they were really scrounging for odd jobs in order to have any income at all.

We need a completely new set of economic and labor numbers that are easy to understand and really explain what is happening here and around the world. The workers' economy doesn't have a heck of a lot to do with the stock market and CEO economy.

What a gem this thread is. Extremely helpful to a non-economist (like me) who's trying to understand why an economy that's showing growth isn't doing squat to help people. I especially appreciate the link to the BLS table. I've been there to try to understand employment, and the site is difficult to mine if you don't know exactly what you're looking for.

:applause:

I was wondering why the figures used are Clinton's last 5 years. Is this because it's a 10 year table? Or is it because we have 5 years of Bush to evaluate so we're looking at 5 years of Clinton? It would be helpful, imho, to get a look at all 8 years of Clinton to evaluate how he did pulling us out of the mire that was the Reagan/BushI years.

The really scary part will start to happen when rich people have gotten their wealth and their profit-making ability totally disconnected from employees and work, and can make huge profits entirely from "moving money around," converting assets, and all the rest of the purely unproductive investment activity they do more and more now. They already have the stock market stratified to two levels, as it never was before, so that their stocks and investments are doing well, but for workers, the unemployment rate, wages, etc., are terrible and unchanging. Also, as someone recently mentioned on a DU thread, this rich traitor Bill Gates just recently converted all assets from the dollar to Euros! Unbelievable, how these rich people will desert and abandon their own country when it needs help--anybody and everybody--at the blink of an eye; and it will only get worse.

I wait for the time, after all this restructuring (to China, etc.), when rich banks and other investors will be totally cut off from the need for us employees to even participate at all for them to make a profit, let alone live a decent life; a completely cut off and unreachable economy only for the capitalist oligarchs, not even based on jobs anymore, but only the manipulations of investing....then what?

In moving jobs I took a small cut in pay but what has affected me more than that is that I'm now paying $300+ a month more for health insurance.

I'm having to cut almost all of my little luxuries.

healthcare premiums and deductibles.At least with most everyone I know!

Below is a copy from Briefing.com of Friday's Chicago PMI (Purchasing Manager's Index)



Here is a link to Briefing.com's Chicago PMI:
Chicago PMI

Note how the lowest reading comes from the "employment" index. In other words, employment is fairing much worse than any of the other purchasing managers' indicators. It appears from this, as in all other indexes, that employment is fairing worse than all other aspects of our economy. Unfortunately, the "employment" factor directly affects more Americans than any of the others.

For some reason the hosting service I used for my original chart stopped working for the original link. I've re-posted with a different link. Hopefully this will work. Here's it is again:

Here's a copy of the latest poll on how the economy is doing from MSNBC-Newsweek. Note that 54% think it is getting worse, while only 25% think it's getting better. (Don't people believe der Fuerher when he says "the economy is strong, and getting stronger? Where's are faith?)



Here's the direct link to MSNBC's poll:

http://www.msnbc.msn.com/id/10311529/site/newsweek/#survey