Wages, Compensation, and the Income Gap

A recent survey by the Associated Press shows that approximately 70% of the American population feels that the income disparity between rich and poor has grown too large, and two-thirds said the government should ensure a job exists for all who want one; further, a slim majority said that the government should do this by such measures as employing those who can't find a job in the private sector, providing training programs to unemployed workers, and imposing higher taxes on the wealthy to redistribute their earnings to the poor. Most interestingly, the same proportion said it was not the government's responsibility to ease income differences.

To begin, wide income gaps are, in general, a bad thing for society. Despite all you'll hear from economists about the labor market determining what a fair wage is, political stability depends upon perceived economic justice. And when somebody's sweating away 40+ hours a week for $30,000/year while folks on the other side of town are working from home making five and six times that, they'll quickly become jaded, and as a result push for rash political measures to attain their version of distributive justice.

So what surprises me isn't that your average Joe would be concerned about this gap, but that there's the belief that the average worker is so much worse off today than he was in the past. The Bureau of Labor Statistics reports 4.5% unemployment in May, slightly lower than average unemployment in 2006, which itself boasted the lowest unemployment rate of the Bush Administration and was right on par with the Clinton years (at least the later ones). Overall unemployment of 4.5-5% is far below the 7%+ of the late '60s through early '80s, and job growth has surged unabated since mid-2003 (and I'm figuring all those new jobs can't be in the military), with over 150,000 jobs created in the month of May alone.

Of course, employment levels aren't really the issue. The issue is compensation. Hip hip hooray if we can give everyone a job, but if they're all working at McDonald's for minimum wage, it's not the ideal state of affairs. And as we saw cited in the survey above, the real issue underlying these sentiments is the declining real wages of workers. For evidence, just check this out:
But what's this really telling us? Sure, it's pretty clear that workers' real average hourly wages are heading south, but this fails to account for overall compensation. Over the past few decades, the trend has been toward cushier benefits packages to replace direct monetary compensation. And indeed, although real wages have generally declined since the 1970s (with the exception of Clinton's second term), real compensation (including benefits, IRA/401k contributions, etc.), are increasing at their highest annual rate since Gerald Ford, even beating out the Clinton years by narrow margins:(I urge you to take a look at a few other charts - and a host of great links and resources - at macroblog, the source of the chart and table provided above.)

So it seems pretty clear that, if nothing else, on the whole the poor aren't getting poorer. But again, we said the issue was not so much compensation, but the differential between the best-compensated and the worst-compensated. How do we address this?

Sure, we can raise marginal tax rates for the wealthiest. But even though we call it a "redistributive" policy, in reality it's first a growth-inhibiting policy: rather than simply splitting
$100 - $80 to the rich guy and $20 to the worker - we're splitting a smaller total between the two. How much that new, reduced sum is, and whether it's a worthwhile trade-off is an empirical question open for discussion, but it certainly should not be a default solution to income gaps. We saw what excessive tax rates do to an economy during the '60s and '70s, and it's always a painful process getting out of the messes they can create (witness Reagan's first term).

Another proposed solution mentioned in the AP survey was providing jobs to those who can't find work in the private sector. But as we discussed with unemployment rates, difficulty finding jobs isn't the real issue. And as I see it, with a national debt that will burden our children and our children's children, expanding the federal payroll is the last thing we need right now. We could also look at this suggestion from a more Keynesian perspective, which would lead us to cut taxes and increase government spending to create demand in the private sector, thus raising employment and wages, but that still only exacerbates the debt. And further, policies pursued in such a manner as an offshoot of the Full Employment Act of 1946 have, sadly, caused higher rates of unemployment than in the pre-FEA period.

Thus, we are left with training programs and education. These are, indeed, the most promising policies to effect a real and sustainable change in income levels, especially as it targets the victims of structural shifts in the American economy, namely the blue collar manufacturing/industrial workers that are watching their jobs flee across the seas to low-wage, low-tax countries. The exact way to frame this program so as to not push people into sectors that are not the most lucrative or efficient is a complex and important question, and one I hope to hash out in more detail in a later post.

I am also happy and eager to hear other proposals to address the income gap in a manner that helps the average worker without causing widespread economic woes. While it's tempting to get caught up in the heart-rending stories of those who have lost their job, or who have labored long and hard in a Sisyphan struggle only to see their relative position in society decline, we must first remember that, despite data on real wage growth, overall standards of living are improving. People who once wondered how to feed their family or provide healthcare are now asking how to put their children through college or save for retirement. There are real issues out there, issues of great importance that we must discuss, but we must keep these issues in perspective and avoid letting our concern for helping the worst-off be manipulated by politicians of either persuasion who rest their prescriptions on rhetoric rather than economic reason.