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Dean Baker, Economic Policy Institute, Washington, DC
The Declining Living Standards on Workers
American workers have seen an unprecedented fall in their standard of living over the last twenty years. Through mostn history, workers could count on rising wages and living standards year after year. There have been exceptions, when the economy slipped into a downturn, but these were generally short-lived, and usually followed by a period of rapid economic growth. Even the great depression only lasted ten years, as the economy was gradually pulled back to life with the build-up for the war. However, for the latest twenty years, the typical worker has not seen a pay raise. In 1993, the typical worker was receiving 7.5% less in hourly wages than they had twenty years earlier (The State of Working America, Economic Policy Institute, p. 121).
Many explanations have been given for this long period of declining living standards. The one most often cited is that productivity, the amount of economic output per hour of work, has grown less rapidly in this period. From 1947 to 1973 productivity grew at a rate of more than 2.5% per year. In the years since 1973 productivity has grown at the rate of just 1.0% per year. The reason for this slowdown is debated, but regardless of the actual reason, slower growth can't explain declining living standards. Slower productivity growth can explain a slower rate of improvement in living standards, it can't explain why they should decline.
Inequality and Workers' Weakened Bargaining Position
The explanation for the decline lies in the enormous increase in inequality over the last fifteen years. The shape of economic growth has changed fundamentally over this period so that virtually all of the gains have been concentrated among those at the top, while those in the middle or bottom have seen stagnant or declining living standards. The poorest fifth of families had a decline in income of 14.8% from 1979 to 1993. The second and third poorest fifth had declines of 7.2% and 2.6%, respectively. By comparison, the richest fifth had their income increase by 18.4%, and the richest five percent by 29.1% (SWA p. 37). Those at the very top did especially well. The pay of the top executives of major corporations is at present approximately 100 times as high as that of a typical worker. In the 1960s, it was about 30 times as high.
This rise in inequality resulted from the weakened bargaining position of workers, and in particular, non-college educated workers, relative to their employers. There have been several important institutional changes that have contributed to this weakening. Beginning in the 1970s, large segments of the economy, such as transportation, communication, and finance were deregulated. This forced well paid workers in industries like trucking and airlines to endure a series of competitive paycuts, just to keep their jobs. A second factor has been the decline of unions. As the share of unionized workers in the labor force has fallen, the ability of workers to press for higher wages has diminished. A third factor has been reduced institutional support for low wage workers from the government. This is most clearly shown by the 30% decline in the minimum wage since 1979. A fourth factor has been the increase in international trade and the mobility of capital. It is a relatively simple thing now for firms to threaten their workers with moving a factory overseas, unless workers take paycuts or make other concessions. By moving overseas, or just threatening to, employers have much greater power over their workers than in prior decades.
Corporations Have Prospered
Corporations have clearly prospered in this environment as have some highly paid professionals, but the bulk of the population has not. The before tax rate of profit has risen more than 1.5 percentage points, from approximately 6.8% in the period from 1952 to 1979, to over 8.4% in the first half of 1995 (Baker 1996). Since corporate taxes have been reduced during this period, the after-tax rate of profit has risen even more, from 4.6% in the earlier period to 6.7% in the most recent business cycle. This fall in corporate taxes costs the government nearly $40 billion per year in lost revenue.
There is little about this pattern of growth that offers much hope for a prosperous future. In spite of these record levels of profit, firms are doing very little investing in new plant and equipment. The amount of investment in new plant and equipment in 1994 (the last full year for which the data is available) was less than 2% of GDP. The amount of money spent on investment was less than in 1979, even before adjusting for inflation. When compared to the size of the economy, the amount of new investment in plant and equipment in 1979 was nearly three times as large as it is at present.
Clearly, the reasons that firms don't invest is not because they lack money. With profits at such high levels, this complaint is not plausible, at least for larger firms. Instead, these firms are choosing to buy stock and other financial assets with their money. In 1995, firms actually bought up over $200 billion more in stock than they issued. Since the stock market was hitting record highs last year, it was very cheap for large companies to get capital by issuing stock. Instead, they chose to buy back the stock they had already issued, using money that otherwise might have financed new plant and equipment. Buying back stock may have made sense from the standpoint of quarterly balance sheets, but the economy as a whole does not grow from purchases of paper assets. It grows from investment in real plant and equipment, and in people.
The Decline of Manufacturing
The failure of the current path of economy is most evident in its impact on the manufacturing sector. At the end of the 1960s, nearly 29% of workers in the U.S. were employed in manufacturing. By the mid-1990s, the picture was substantially different. By the end of 1995, less than 16% of workers were employed in manufacturing. The number of workers in manufacturing industries has fallen by nearly 2 million since 1969, while the number of workers overall has increased by 46 million.
Some of the factors behind the declining employment in the manufacturing sector are part of the normal process of economic growth. For example, as economies get richer there tends to be a shift in consumer demand from goods to services, so that proportionately less money will be spent on manufactured goods. Also, productivity growth is much faster in the manufacturing sector than in the service sector, so fewer people are needed to produce the same amount of output. However, part of the decline of manufacturing is attributable to the decisions of firms to move operations overseas, or to fail to make the investments in equipment or worker training that would be needed to remain competitive. Also, many smaller firms often find themselves unable to attract the capital they need to maintain their competitiveness and to expand into new markets, since they have very limited access to financial markets. These smaller firms comprise a large, and probably growing, share of manufacturing in the U.S. Partly as a result of this situation, the U.S. has been running an annual trade deficit in excess of $150 billion for the last several years. If this trade deficit were eliminated it would create over 2 million additional manufacturing jobs, an increase of almost 15%.
For most workers, particularly the 70% without college degrees, manufacturing jobs will continue to be relatively good jobs. They pay higher wages than non-manufacturing jobs, and are much more likely to offer fringe benefits in the form of pensions and health care. These jobs also generally lead to higher wages year by year, as pay generally rises with rising productivity. In addition, the availability of good jobs in manufacturing helps boost wages and living standards for the non-college educated portion of the workforce as a whole.
If firms were to invest in the capital and training needed to keep their factories competitive, it would lead to significantly higher living standards for large segments of the population. Ultimately, it should make the nation as a whole wealthier, since manufacturing has a more rapid rate of productivity growth than other sectors. By increasing the proportion of manufacturing that takes place in the U.S., overall productivity growth will be more rapid, allowing for greater improvements in the standard of living.
Summary
- Manufacturing employment has fallen by nearly 2 million since 1969. Corporate decisions to reduce domestic manufacturing capacity have contributed significantly to the drop in living standards for U.S. workers.
- For most workers, particularly the 70 percent without college degrees, manufacturing jobs will continue to be relatively good jobs. They pay higher wages than non-manufacturing jobs, and generally offer better pension and health benefits.
- Smaller manufacturing firms, which comprise a large, and probably growing share of manufacturing in the U.S., have trouble attracting the capital they need to maintain their competitiveness.
- If firms were to invest in the capital and training needed to keep their factories competitive, it would lead to significantly higher living standards for large segments of the population.
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