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Tilting at Windmills

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February 20, 2008
By: Kevin Drum

CHART OF THE DAY.... After several years of the most sluggish economic expansion on record, wages for non-managerial workers finally turned up in 2007. But not for long. As this EPI chart shows, in October the growth halted and for the past three months it's been, once again, negative:

A year ago, real hourly and weekly earnings grew on a yearly basis by over 2%; this January, they are both down by about 1%. Note also that over the past two months, due to the decline in average weekly hours — a function of the weakening job market — real weekly earnings are falling more quickly than hourly earnings.

But don't worry. I'm sure another tax cut for the rich is in the hopper to fix this all up.

Kevin Drum 12:52 PM Permalink | Trackbacks | Comments (33)

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OFF TOPIC:

Check out talkingpointsmemo.com. Right after the piece where they say to look out for the coming attacks from Hillary there's an advertisement showing some hideous female zombie troll snarling at the camera with the caption "Zombify yourself." Very funny.

Posted by: anon on February 20, 2008 at 1:12 PM | PERMALINK

There is really only one way to reverse the decline in real wages and that is to change the dynamics of the labor market. If Congress were to commit itself to creating and maintaining a modest labor shortage wages would be driven up by market forces. In a labor market where there are more jobs available than there are people to fill them, employers will try to outbid each other for the labor they need. It's really quite simple, actually.

Posted by: James Kroeger on February 20, 2008 at 1:15 PM | PERMALINK

Of course, tax cuts for the rich (and more huge deficits!) will cure all!

Posted by: Gore/Edwards 08 on February 20, 2008 at 1:19 PM | PERMALINK

The Bush tax cuts applied to everyone who pays income tax. The cut was greater for lower earners, as a percentage of taxes paid. (Of course, the rich received more dollars of tax reduction than the poor, since the rich pay far more income tax than the poor.) Many middle-lower income people had their income tax fully eliminated.

If the Bush tax cuts are allowed to expire, that will reduce the after-tax income of the group shown in Kevin's chart.

Posted by: ex-liberal on February 20, 2008 at 1:29 PM | PERMALINK

Ex-Lib(I once had a brain maybe) That tired old screeching just doesn't hold water. Or if you will that dog don't hunt.
I don't even have to site any real facts because I know many who post behind me are sure to.
What kind of a dream world do you live in? Has anything thats been going on in this country for the past seven years sunk through to your head in the sand.
People in this country are hanging on by a thread. Almost every single gov't agency that at one time worked reasonably well(maybe not perfect) has been dismantled into an apparatus to help corporations and the wealthy.
The Bush administration is involved in so many instatnces of mismanagement,incompetance and outright graft and corruption that we're all saturated with it to the point that we don't we care anymore.
And you have the boldfaced shit-for-brains audacity to try and intimate that tax cuts are in some way a pancea for all ills?

Posted by: Gandalf on February 20, 2008 at 1:48 PM | PERMALINK
There is really only one way to reverse the decline in real wages and that is to change the dynamics of the labor market. If Congress were to commit itself to creating and maintaining a modest labor shortage wages would be driven up by market forces.

You're making the problem harder than it is. If you want to increase real wages, Congress simply needs to make it less expensive to hire people at a given wage. An overall revenue-neutral elimination of the preferential tax treatment of capital income in favor of reduced income tax rates for all tax brackets would be one way to acheive this.

Posted by: cmdicely on February 20, 2008 at 1:49 PM | PERMALINK
The cut was greater for lower earners, as a percentage of taxes paid.

No, it was greater for lower earners, perhaps, a a percentage of so-called "income" tax paid, but not as a percentage of overall federal tax burden (even including only income and payroll taxes, which are both actually income taxes; the division is inherently deceptive.)

Posted by: cmdicely on February 20, 2008 at 1:51 PM | PERMALINK

"grew on a yearly basis by over 2%"

Of course, real inflation (not core inflation) probably grew at 6% or more, so we're still screwed.

Posted by: Speed on February 20, 2008 at 2:11 PM | PERMALINK
Congress simply needs to make it less expensive to hire people at a given wage.
This has actually never been true. The idea that employers are always ready to hire more people if only the price of labor were to come down enough is nothing but pure fantasy.

It is an argument that is very similar to the claim that increases in the minimum wage cause cause a reduction in total employment. In fact, employers do not keep people on the payroll as an act of charity. In competitive markets---those most likely to be affected by minimum wage increases---no one is kept on a payroll unless that person is thought to be absolutely necessary to the operation.

For example, if one fast food restaurant were to cut its staffing after a hike in the minimum wage, it would find that it is not able to offer the same level of service. A competitor who chooses to simply accept the extra cost and maintain its staffing levels will have a competitive advantage over those who cut staffing levels.

The bottom line is simply this: in competitive markets, firms generally employ the number of people they need, no more and no less. IF the costs of all competing firms are increased in the same way, then none of them achieves a competitive advantage over the others. They will all pass on the cost hikes as much as the market will allow, but they will simply accept the lower profit margin if they can't.

Posted by: James Kroeger on February 20, 2008 at 2:14 PM | PERMALINK

But don't worry. I'm sure another tax cut for the rich is in the hopper to fix this all up.

Maybe we could find some leaders of a reform movement to get people fired up.

Either the necessary enthusiasm is there for anyone who wants to inflate their ego by practising their oratory, people-skills, leadership/organizational skills, and inspirational one-on-one every day until they score big victories (If it sounds like you're smart enough to do those things, the opportunity is there! You too can be a big hero!), or, the extremely large numbers showing up at the primaries will not turn up at the general, and will turn out to have been made up partly of raiders. Whatever- it will all show itself for what it is in a while. Then, either way, people will have no excuse for being lazy.

Anyway, anyone remember Doc Hopper from that muppet movie?

Posted by: Swan on February 20, 2008 at 2:17 PM | PERMALINK
The idea that employers are always ready to hire more people if only the price of labor were to come down enough is nothing but pure fantasy.

That's not the idea at issue here. The idea is that if the effective wages a firm could offer at the same cost to the firm were lowered for all firms in the economy, the general effect on net wages would be positive (not that it would be positive for every firm or every individual worker.) Its not about increasing employment at all, though on the margins it may do that by making it possible for workers to be willing to accept work at a cost that employers can afford to pay, though that's more likely to have a very slight effect on unemployment rates by bringing people into the labor force from outside rather than employing those counted as "unemployed". OTOH, by increasing wages and labor force participation, its also likely to increase aggregate demand and increase the number of jobs available; but that's a secondary effect.

Posted by: cmdicely on February 20, 2008 at 2:49 PM | PERMALINK

James Kroeger,

In a labor market where there are more jobs available than there are people to fill them, employers will try to outbid each other for the labor they need. It's really quite simple, actually.

Not necessarily. Remember there is a global market for both labor and business.

If US businesses face a shortage of cheap labor in the US they may either move the work to another country of move the entire business to another country. They would do either of those before (shudder) raising wages.

It is not like they or the work have to stay here.

Posted by: Tripp on February 20, 2008 at 2:54 PM | PERMALINK

You know that letter everyone gets yearly from the SS department showing your yearly wages since you started working?

A couple times I've taken that info plus the yearly inflation rate and plotted a chart of my wages over my career in constant dollars.

Yowsa but that is an eye opener. It is pretty depressing too.

Posted by: Tripp on February 20, 2008 at 2:58 PM | PERMALINK
In a labor market where there are more jobs available than there are people to fill them, employers will try to outbid each other for the labor they need. It's really quite simple, actually.

Not necessarily. Remember there is a global market for both labor and business. If US businesses face a shortage of cheap labor in the US they may either move the work to another country of move the entire business to another country. They would do either of those before (shudder) raising wages.

You may find it surprising to learn that it really doesn't matter how many jobs leave the country. If Congress were to spend enough money on PUBLIC INVESTMENT, it could easily boost aggregate demand for labor in excess of any loss of jobs within the private sector. You can't import construction and other services.

That is, in fact, the one way the US can compensate for the losses that participation in the global economy has imposed on us. Not only could we benefit from the lower prices of global markets, but we would also be able to benefit from a much needed INVESTMENT our nation's infrastructure. We would gain in terms of our real wealth production/consumption.

Posted by: James Kroeger on February 20, 2008 at 3:16 PM | PERMALINK

You are correct, cmdicely, To be precise, Bush's cut in federal income tax was a larger percentage of federal income tax for lower income people than for higher income people. The difference was substantial, including many lower income families who had a 100% cut in federal income tax.

Gandalf, you see people hanging by a thread. Maybe I'm a lot older than you are, but I see people who are wealthier than ever before in history. When I was young, some families didn't have telephones. As a young married, I had a telephone with a party line, to save money. The typical residence had only a single telephone. Cell phones were a fantasy in the comic strips. (Dick Tracy had a 2-way wrist radio.)

I had a small Black and White television with a poor picture and few stations. Almost every family today has at least one color TV with broad access.

Computers and internet obviously were unheard of. I recall spending over $200 for a basic calulator needed for my wife's doctoral research. It pretty much did only addition, subtraction, multiplication and division.

When I was young, there wasn't enough food. Hunger was a real problem in this country. Today, hunger is rare, but obesity is common, particularly among the poor.

Even middle class people seldom ate out in restaurants when I was a child. Today, low-cost fast food makes eating out available to all income groups.

Medical care isn't perfect, but limited medical care is actually available to every American, because Emergency Rooms are prohibited from turning people away. At the inner city hospital where my wife works, many residents use the Emergency Room as their GP.

Today's poor have wider access to indoor plumbing, air conditioning, automobiles, larger residences than ever before in history.

It's certainly true that many people are spending themselves into debt, so they are hanging by a thread to the lives they live. Still, they are darn good lives.

Posted by: ex-liberal on February 20, 2008 at 3:35 PM | PERMALINK
When I was young, there wasn't enough food. Hunger was a real problem in this country.

There has never been not enough food in this country. As with most places in the world, the hunger that exists now (which doesn't officially exist anymore because the USDA changed the status "food insecure with hunger" to "very low food security" in 2006) and has existed previously in the U.S. is not due to supply inadequacy but to distributional injustice.

Today, hunger is rare, but obesity is common, particularly among the poor.

Today (as of 2006), hunger (or at least, what the USDA called "hunger" up through 2005, but has renamed to make it sound better) is experienced by 7.7 million adults and 3.4 million children in the US, according to the USDA, and food insecurity (the state of a household being "uncertain of having, or unable to acquire, enough food to meet the needs of all their members because they had insufficient money or other resources for food") is experienced by 35.5 million people in the US, including 12.6 million children.

Posted by: cmdicely on February 20, 2008 at 4:32 PM | PERMALINK

I had a small Black and White television with a poor picture and few stations. Almost every family today has at least one color TV with broad access.

Oh, look -- it's the world's most bogus argument again!

You know, when people travel these days, they take airplanes instead of trains, and airplane tickets used to cost twice as much as train tickets, so that clearly shows that we're all rich beyond our wildest imaginings!

Posted by: Mnemosyne on February 20, 2008 at 5:08 PM | PERMALINK

Buy a Mac!

Posted by: thersites on February 20, 2008 at 5:11 PM | PERMALINK

James Kroeger,

You may find it surprising to learn that it really doesn't matter how many jobs leave the country. If Congress were to spend enough money on PUBLIC INVESTMENT, it could easily boost aggregate demand for labor in excess of any loss of jobs within the private sector. You can't import construction and other services.

"If" is such a small word and yet so powerful, don't you think?

I agree that you have identified a solution. Sadly, though, I don't think the time is right for that solution. We will have to sink much farther before we would consider public investment from the government.

Powerful forces have been at work for a long time to convince us that we need to be passive and corporations are better than government and all the rest.

We are not at the bottom yet. We need to be at the bottom before we even have a chance of bouncing back up.

Posted by: Tripp on February 20, 2008 at 5:11 PM | PERMALINK

James Kroeger wrote: If Congress were to spend enough money on PUBLIC INVESTMENT, it could easily boost aggregate demand for labor in excess of any loss of jobs within the private sector.

I believe this is a fallacy. The money Congress would spend on public investment would be taken from the private segment in increased taxes. The reduction of the private segment's capital would reduce their ability to create jobs.

In general, private investment is better than public investment at creating jobs. Entrepreneurs like Bill Gates and Steve Jobs will create more jobs with a given amount of capital than the government will. So increased public investment would actually make the country poorer.

Posted by: ex-liberal on February 20, 2008 at 6:25 PM | PERMALINK

Of course wages are dropping. We have massive legal and illegal immigration, often into labor areas that are already glutted. This is supply and demand, by the way, not xenophobia (obviating the lib reflex knee jerk). Globalisation puts pressure on wages to equilibrate worldwide. Recent auto company buyouts, for ex. We must also distinguish between GDP and growth and the wealth of the nation. They are not the same.

Posted by: Luther on February 20, 2008 at 7:18 PM | PERMALINK

Entrepreneurs like Bill Gates and Steve Jobs will create more jobs with a given amount of capital than the government will.

Is that why the government is by far the largest employer in the country with 2.7 million employees and Microsoft has about 63,000?

The money Congress would spend on public investment would be taken from the private segment in increased taxes. The reduction of the private segment's capital would reduce their ability to create jobs.

Scandinavian countries with tax rates nearly twice that of the U.S. have unemployment rates at or below ours (e.g. Norway was 2.5% in 2007). Apparently their private sectors are not suffering from higher taxes and reduced capital.

Posted by: trex on February 20, 2008 at 7:45 PM | PERMALINK

trex, Europe as a whole has had a low rate of economic growth and considerably higher unemployment than the US. The one European country with a high economic growth rate is Ireland, which has low tax rates compared to the rest of Europe.

Posted by: ex-liberal on February 20, 2008 at 8:45 PM | PERMALINK
In general, private investment is better than public investment at creating jobs.
This is actually not true. If it were true, then we would not have seen real wages decline over the past few decades. When the private sector is not fully employing all of the economy's human resources, there is room for the government to employ them in the production of real wealth = improved infrastructure.

Creating jobs is simply a matter of spending money. Whether the government is spending the money or private citizens or firms, it all has the effect on the economy.

The money Congress would spend on public investment would be taken from the private segment in increased taxes. The reduction of the private segment's capital would reduce their ability to create jobs.
This is not even close to true. Yes, increasing taxes on 'capital' would shrink the supply of 'capital' somewhat, but since there is always an oversupply of capital whenever there is any level of unemployment, the reduction in supply would not hurt the private sector's ability to create jobs at all.

One of the mistaken assumptions you are basing your 'belief' on is the notion that most investments by firms are utterly dependent upon savings. In fact, roughly 85% of the money that corporations spend on investment comes from retained earnings or other internally generated funds That means that only about 15% of corporate investments are funded by borrowing or sales of equity.

Posted by: James Kroeger on February 20, 2008 at 8:56 PM | PERMALINK

trex, Europe as a whole has had a low rate of economic growth and considerably higher unemployment than the US.

So the fuck what? Norway and Denmark have higher taxes and lower unemployment than the U.S. On its face this refutes your contention that taxes inhibit job creation.

Unsupported assertions about "Europe as a whole" are about as valid as your December contention that the U.S. is experiencing an economic boom.

Posted by: trex on February 20, 2008 at 9:25 PM | PERMALINK

trex, Europe as a whole has had a low rate of economic growth and considerably higher unemployment than the US.

Europe "as a whole" has a higher GDP than the U.S.

Feel free to begin issuing retractions and or apologies at any time.

Posted by: trex on February 20, 2008 at 9:33 PM | PERMALINK

trex, the GDP is the size of the total economy. The rate of growth is the change in the GDP. Your point doesn't contradict what I wrote.

The population of the European Union is 490,426,060, whereas the population of the US is only 301,139,947. That's why the EU's GDP is bigger.

But, on a per person basis, our economy is doing better. The EU's GDP per person is $29,790 whereas the US GDP per person is $43,816.

Posted by: ex-liberal on February 20, 2008 at 11:47 PM | PERMALINK

>>ex-liberal:
>>But, on a per person basis, our economy is doing >>better. The EU's GDP per person is $29,790 whereas the US GDP per person is $43,816.

Not necessarily. You need to factor in several things:

Europeans generally start working later than US. My understanding of this is that because of low to no higher education costs, majority of young people don't work during their college years.

Europeans also retire earlier. And in between, they work less hours and have more vacation time. If you compare prime working years (~25-54 years of age), Europe is pretty much at parity with the US.

All this with higher taxes, welfare states, and univeral health care too.

Posted by: Dave on February 21, 2008 at 1:17 AM | PERMALINK

In which Kevin yet again talks about wages and salaries and studiously avoids mentioning total compensation and thinks that nobody will notice.

And in which he again lies about the effect of the Bush taxation cuts.

Posted by: a on February 21, 2008 at 8:05 AM | PERMALINK

"In which Kevin yet again talks about wages and salaries and studiously avoids mentioning total compensation and thinks that nobody will notice."

ROFL.... Dear heart, if you have information that contradicts Kevin's point, by all means, let's hear it. Your silence speaks volumes.

"And in which he again lies about the effect of the Bush taxation cuts."

Do tell us where there's a "lie", won't you, dear? Because I don't see a single line in Kevin's post that talks about Bush's "taxation" cuts.

Posted by: PaulB on February 21, 2008 at 10:44 AM | PERMALINK

"But, on a per person basis, our economy is doing better."

Only if you assume that GDP is the end-all and be-all of the economy, which would be pretty damned stupid. Free clue: there are quite a few more metrics that demonstrate that our economy is not, in fact, "doing better."

Posted by: PaulB on February 21, 2008 at 10:45 AM | PERMALINK

trex, the GDP is the size of the total economy. The rate of growth is the change in the GDP. Your point doesn't contradict what I wrote.

But the fact that countries like Iceland and Norway have higher rates of growth in their GDP than the U.S. does refute it. AND they manage to do this with higher tax rates and still maintain low unemployment.

Were you aware that the U.S. ranks about 140th in the world on real GDP growth? That's not so great by your preferred measure.

Also, trying to include former Soviet bloc countries with "Europe in general" when comparing to the U.S. is like saying "North America in general" and throwing Mexico into the mix.

You are a blithering idiot.

The population of the European Union is 490,426,060, whereas the population of the US is only 301,139,947. That's why the EU's GDP is bigger.

Then why do China and India have three times our population respectively and lower overall GDP? By your logic they should be higher.

But, on a per person basis, our economy is doing better. The EU's GDP per person is $29,790 whereas the US GDP per person is $43,816.

Yeah, but Luxermbourg's is better and Norway's is better and Ireland's is better and a bunch of European countries are close AND they have universal health care and universal unemployment insurance and free daycare and way more vacation and are cleaner and have less crime and a quality of living far surpassing much of the U.S., as many have pointed out upthread.

Now that your talking points have been eviscerated by half a dozen people here, you are excused.

Posted by: trex on February 21, 2008 at 6:00 PM | PERMALINK

It's simple supply and demand. When the supply increases (workers) relative to demand (jobs), the price (wages) goes down. Everyone in the room is ignoring the 300 lb immigration gorilla.

Posted by: Warbonnet on February 21, 2008 at 10:02 PM | PERMALINK
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