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Wednesday, August 02, 2006
Drum noodles on COLA
I have an answer to Kevin Drum's noodling:
As everyone knows, median wages (adjusted for inflation) increased steadily from the end of World War II through the 60s. Then, in the mid-70s, they suddenly stagnated. Depending on who and how you measure things, median wages have either gone up slightly, stayed flat, or gone down slightly since then. But whichever measure you use, wages haven't come anywhere close to keeping up with economic growth over the past 30 years.
Why? Lots of reasons (though many of them, like globalization, have been considerably overstated), but here's one the might have contributed: the widespread acceptance of COLAs (cost of living adjustments) that took hold during the inflationary 70s. During that decade it became increasingly common to view wage increases as a response to inflation and to institutionalize COLAs as a way of dealing with this.
...But I wonder if there's a widespread perception that as long as you're keeping up with inflation you're doing OK, and that's led to an institutionalized set of lowered expectations about wage increases? If inflation were zero, and it were more obvious that wages had gone nowhere for the past 30 years, would people be more unhappy about things than they are?
The answer goes back to this post, where I wondered about what percentage of our economic output should be returned to workers as wages. We know this: the answer can't be that wages grow faster than inflation forever -- eventually, wages would be 100% of economic output and could no longer grow faster than inflation. We also know this: as wages, returns on investment shrink. At some point -- and it varies by risk -- investment will disappear because the returns just aren't there. Why build a new widget factory if your labor costs will consume all your profits?
Wages should grow faster than inflation until we reach a point where wages and returns on investment are in a fair balance. Perhaps we are at that point now. Some would surely argue that the market has brought us to this balance point and that if we artificial push wages up, we will pay a high cost in the long run. Investment would dry up and jobs would disappear.
I don't think we're at that point. I think the thumb remains on the investment side of the scale. For a number of reasons, wages have lost to return on investment:
- The decline of labor unions
- Easy credit including interest-only loans and ARMs have disguised the household spending gap
- Housing price increases have given people access to wealth
- Wall Street demands short-term performance
- Globalization
- Corporatization has eliminated individual wage negotiation. (Was there ever really a time where you went and asked your boss for a raise? As industries consolidate, wages within companies are more uniform and less negotiable. As fewer companies compete within an industry, there's less wage competition)
I'm sure there are other factors at play, as well. Workers should be doing better. Democrats should pursue policies that help workers enjoy their fair share of the nation's bounty.
