Everyone knows gas prices have risen sharply in recent months, but the government’s statisticians last week helpfully put a number on the rate of increase: 24.3 percent in the year to June.
This helped propel the overall inflation rate to 2.9 percent, the highest level in more than six years. Over the same period, average hourly earnings rose by only 2.7 percent, so most people are a bit worse off than a year ago.
{mosads}Unfortunately, this is not a new phenomenon. Stagnation in real — that is, inflation-adjusted — wages is one of the key economic and political stories of the past few decades. From 1979, when the data begin, through 2017, median real wages have fallen by 0.1 percent per year, on average.
The true picture probably is a bit less bad than this, given that most economists think the consumer price index index overstates actual inflation. But public perceptions are what matter, and most people think inflation is higher than the official rate so, presumably, they feel even worse-off than the data suggest.
This is not how things are meant to be. Real wages are supposed to rise in line with the rate of productivity growth — output per worker hour — over time.
Since 1979, productivity has increased by a total of 98 percent, but median real wages have fallen by 4 percent. The gap is smaller if real wages are calculated using alternative measures of cash wages and inflation, but it’s still enormous.
It doesn’t take a big leap of imagination to make the connection between the frustration triggered by years of flat or falling real wage growth and the emergence of Donald Trump, the only Republican candidate who campaigned on a platform of improving the lot of the average worker.
Whether he ever had any intention of doing that — and whether a Republican Congress would have let him — is not the point; he recognized that everyone else seeking the nomination had nothing to offer except trickle-down, and that gave him an opening.
After nearly 30 years of drought, trickle-down doesn’t play with voters. Trump became president because he acknowledged that very real grievance and used it as leverage to appeal more broadly to white voters who felt their status, economic and societal, was being eroded.
What, then has gone wrong? Why have people not reaped the rewards for their efforts in the most free and flexible labor market in the developed world? The story is multi-faceted but not complicated.
People’s wage-bargaining power has been eroded by a combination of forces, including declining trade union membership, globalization and technological change, which together have driven a wedge between overall productivity growth and the experience of the typical employee.
These forces have been emerging gradually over an extended period, but the crash of 2008 and its aftermath made everything much worse.
Union members in the private sector typically are paid some 19 percent more than non-members, but membership rates have been falling since the data were first collected back in 1983.
Only 6.5 percent of private-sector workers now are union members, and unions representing public-sector workers are under increasing pressure.
So-called “Right to Work” legislation in red states and the recent Supreme Court decision banning public-sector unions from charging fees to non-members to cover the costs of collective wage bargaining and other services are serious long-term threats to the wage premium for union members.
The impact of globalization and technological change has been profound but uneven, especially in manufacturing, which now accounts for only 8.4 percent of private-sector employment, down from 20.6 percent in 1980.
Manufacturing jobs no longer pay more than average, but they do pay much more than jobs in fast-growing sectors like leisure and hospitality, which have been growing very rapidly.
The country as a whole has benefitted enormously from globalization, which has driven down prices of almost all goods, but very little of those gains have been used to support people whose jobs have disappeared as a result.
Tech change is now making inroads into service-sector jobs too, though it’s worth remembering that previous periods of wrenching change did not result in permanently higher unemployment; the replacement of the horse-driven economy with the internal combustion engine destroyed millions of jobs but created many millions more, for example.
Education is the answer to the loss of low-skilled employment, but standards across the U.S. vary enormously, largely because state and local taxes provide about 92 percent of funding for elementary and secondary education.
Low standards in poorer areas, therefore, tend to persist. In an economy where real wage gains have been much higher for people with college degrees than without, this matters. Donald Trump himself is a one-time national nightmare, but populism won’t disappear when he leaves office unless the structural forces that give it strength have been addressed.
On top of these structural forces holding down real wage growth, the crash of 2008 made things much worse. The deep, long recession drove unemployment up to 10 percent, allowing businesses to grab, and then hold onto, a much bigger share of national income than usual.
Scared people don’t push for bigger raises; they’re just happy to have a job. This part of the story, though, is changing, at last. Unemployment is now just 4 percent, and the pace of layoffs has never been lower, as a share of the workforce.
The number of people voluntarily quitting their jobs — presumably, so they can take a better-paid job elsewhere — is at its highest since early 2001, and businesses are screaming that they can’t find all the people they want to hire.
Wage growth, therefore, likely will rise sharply over the next year, but it will take many years of rapid gains to undo the damage caused by the crash. The Fed, fearing inflation, likely won’t allow that to happen, so a sustained catch-up in real wages probably is a story for the next economic cycle.
In the meantime, the only proven ways for individuals to lift themselves up are the same as they ever were: Get educated, and get organized.
Ian Shepherdson is the chief economist and founder of Pantheon Macroeconomics, a provider of economic research to financial market professionals. Shepherdson is a two-time winner (2003, 2014) of the Wall Street Journal’s annual U.S. economic forecasting competition.