The ratio of wages to the cost of living is what the economist calls real wages; the desirability of having real wages as high as possible, consistent with high employment, is a social objective. Rises in real wages do for the most part come about in fact as a consequence of rises in productivity. In a modern economy, what has [sic] normally to be expected is rising productivity. – J. R. Hicks: Unions, Management and the Public; New York, Harcourt, Brace, and Co., 1960
What Hicks wrote 58 years ago had been true for more than 100 years. But 13 years later, in 1973, his economic model crashed. Productivity and real wage growth, which had been so tightly bound for so many years, parted company.
The consequences have been enormous. Hourly paid workers comprise about 60 percent of wage and salary workers. In Hicks’s day, nearly a third of all workers were unionized. In 2017, however, the union membership rate had fallen to 10.7 percent, according to the U.S. Bureau of Labor Statistics. It’s only that high because of public sector participation. The union membership rate of public sector workers (34.4 percent) is more than five times higher than that of private sector workers (6.5 percent). Ponder that for just a moment. Only 6.5% of private sector workers are unionized today. This, despite union members having median weekly earnings about 25 percent higher than earnings for nonunion workers in comparable jobs ($1,041 versus $829).
This presents us with a befuddling paradox:
- Since 1973, the year when hourly wages and productivity waved goodbye to each other, real wages have been essentially flat, rising about 4% in the intervening 45 years;
- But in the same period, the CPI has risen 586%. That’s right. What you bought for $1.00 in 1973 will cost you $5.86 as of one month ago.
- Yet throughout this period, union participation and membership has declined by roughly 50%, despite union membership resulting in considerably higher wages for workers.
In Massachusetts, my home state, union membership was 12.4% in 2017, but 70% of that was in the public sector. At the recent Workers’ Compensation Research Institute’s annual conference I asked Steve Tolman, President of the Massachusetts AFL-CIO, why union membership hasn’t risen like a rocket to the moon given the persistent stagnant growth of real wages. He said he thought legislatures and employers had made it increasingly more difficult to win a union campaign. So, I then asked Keynote Speaker Erica Groshen, Ph.D., former Commissioner of the U.S. Bureau of Labor Statistics, her opinion. She wasn’t sure if there was a link between lack of union membership and stagnant real wage growth and suggested more research should be done. And in yesterday’s New York Times Louis Uchitelle suggested that American manufacturers relentlessly moving manufacturing jobs offshore has led to a steady decline in union membership – you can’t be in a union if you don’t have a job. The title of Uchitelle’s piece was, “How Labor’s Decline Hurt American Manufacturing.” Could have just as easily been titled, “How American Manufacturing’s Decline Hurt Labor.”
Regardless, what we’re left with is this (as I’ve written before): The 60% of the American workforce that is paid hourly resembles a swimmer trying to catch up to a battleship; with every stroke he falls farther and farther behind.
One highly illustrative area where meager wage growth has impacted the American family can be found in the cost of health care.
In 1989, Herb Stein (father of Ben), former Chairman of President Nixon’s Council of Economic Advisors, coined Stein’s Law*, which says, “If something cannot go on forever, it will stop.”
Do you think this can go on forever? What are the societal and political consequences if we see continued flat wage growth, the accelerating decline of private-sector unions, a rising CPI and an increasingly costly health care burden for families? Do you think today’s polarized American society is capable of addressing, let alone reversing, these decades old trends? What will it take for that to happen? I wish I knew.
But here is something I do know. If employers do not begin to do their best to address these issues – wage stagnation and ever rising health care costs that come with ever increasing deductibles – then unions and people like Steve Tolman, dormant for so long, will, and they’ll come with all guns blazing.
* Stein’s Law appeared on Page One of the June 1989 issue of the “AEI Economist” under the headline “Problems and Not-Problems of the American Economy.”
