Politics & Ideas
The U.S. Needs a New Social Contract
We must close the gap between productivity and compensation.
By William A. Galston
Feb. 11, 2014 7:46 p.m. ET
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To be sure, a piece of the problem is cyclical. Between 2007 and 2012, household incomes fell for five straight years, to the 1989 level. Despite some improvement in 2013, household incomes today stand 6.4% below where they were at the beginning of the recession and—remarkably—4.7% below the level at the end of the recession, according to Sentier Research. A more robust recovery would certainly help.
But the big story goes well beyond even the Great Recession. In the quarter-century after World War II, total compensation—wages and benefits that workers receive—rose in tandem with productivity gains.
Then everything changed. The gap began to widen in the 1970s, and then it soared. Between 1979 and 1990, productivity rose annually by an average of 1.4%, while compensation averaged increases of only 0.5%.
The 1990s were better:
Since 2000, the picture has dimmed again. Although the pace of annual productivity gains has actually increased to 2.3%, compensation rose by only 0.9%, and the gap widened still more.
Taken individually, these numbers may not seem significant. But their cumulative effect has been dramatic. In 1947, labor received 67% of nonfarm business output. At the end of 1973, that figure still stood at 66%. In 2012 (the latest year for which data have been released), labor received only 58% of total output, the lowest by far in the entire postwar period.
During the past four decades, forces at home and abroad have combined to shift the balance between labor and capital in the United States, a trend that shows no sign of reversing. Increasing the minimum wage might help at the margin. But the problem is much more fundamental, and it extends well beyond our borders.
Since 1990, labor's share of total output has declined in almost every country. In half of them, the decline began in the 1970s and amounts to 10 percentage points or more. The U.S. is anything but an outlier.
Summarizing a large body of research, a 2012 report for the Organization for Economic Cooperation and Development (with 34 member countries) attributes this development to three principal factors: the worsening position of low-education workers, changes in technology, and the globalization of production, competition and capital flows. The OECD was unable to find a strong correlation between the strength of collective bargaining in specific countries and labor's share of their output, and the report suggests that globalization broadly reduced workers' negotiating power, regardless of collective-bargaining arrangements.
When compensation fails to keep pace with productivity, workers' purchasing power becomes less able to sustain economic growth. Since 1990, two trends masked the difficulty: rising household debt relative to income, and growth in overseas markets as developing and former communist-bloc countries entered the global economy. But U.S. household debt reached unsustainable levels by 2007, and the boom in developing countries—especially China, India, Brazil, South Africa and Turkey—appears to have peaked. As both Europe and the U.S. are discovering, the domestic market still matters, and weak gains in household income are bound to retard economic growth.
What can we do? A serious long-term infrastructure program would boost employment and wages as well as economic efficiency. A crash program to reduce our appalling high-school dropout rate while creating high-quality technical training would improve the prospects for workers without college degrees. A renewed commitment to basic research would help create new products and industries down the road.
But the facts push me to a more radical conclusion: We cannot expect robust, sustainable economic growth unless we can figure out how average households can participate in the fruits of that growth, as they did in the postwar period. We need nothing less than a new norm—a revised social contract—that links compensation to productivity. And because we cannot return to the conditions that once sustained that link, we need new policies to bring it about.
Neither political party has come close to proposing anything of the sort, and the American people know it.
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