One of the statistical touchstones for left-leaning economists is the run of figures showing that US workers have suffered three decades of flat wages. There is no better way to illustrate how capitalism, marching to its own tune, fails most of America’s 160 million workers than wage data that hardly moves from year to year after inflation is taken into account.
Nobel prize winner Joseph Stiglitz and best-selling economist Thomas Piketty often characterise the 1980s and 1990s, as well as the 2000s until the financial crash, as periods of stellar growth that bypassed the average worker . This story of workers slaving, only for corporations to reap the benefits is allied to Piketty’s history of wealth accumulation , which puts a figure on the astounding riches in property and savings amassed by the most affluent 1% in recent years.
But what if a re-reading of the data reveals the Reagan and Clinton years actually boosted the wages of blue collar and middle income households? Would the broader argument that unfettered capitalism always drives down the proportion national income taken in wages be fatally undermined?
The answer can be found in the pages of a report for the Brookings Institute that looks for the first time at census data going back to the beginning of the 1980s and examines groups of workers and charts their progress as they age.
It is a study that might help us understand the rise of Donald Trump as a populist blue collar hero and, at the other extreme, the left-leaning Vermont senator Bernie Sanders in the upcoming presidential primaries. Not because ordinary workers found themselves stuck in a rut for 30 years when all around them enjoyed the party of the century.
The new data shows that many of them had much higher incomes to splash on homes and cars. Instead the anger comes from their gains being wiped out from the 2001 recession onwards. And the only response of George W Bush’s team and the Federal Reserve was to protect the rich with tax cuts and cheer workers with ultra low interest rates that, as we know, underpinned the sub-prime mortgage scandal.
Both Trump and Sanders appeal to people who blame the slide in their living standards over the last decade, at least in part, on a political elite that failed to understand their concerns.
Until recently, an examination of the labour market relied on the annual publication of average wages. That is how the story of flat wages for the many and super-returns for the few over such a long period has emerged. Each calculation of average wages is a snapshot of all the people in the workforce. Unfortunately, millions of people quit the labour market during the year and others join. It is not the same cohort, and not just at the outer margins.
Robert J Shapiro, a former economic adviser to Bill Clinton who now runs the Sonecon consultancy in Washington, grabbed the opportunity to look at the raw census data when the US statistical office published it a few years ago.
He tracked the median incomes of average households as they travelled through the decades, checking on the progress of men versus women, Hispanic people versus black and white people, college graduates and different age groups. The report presents us with a more nuanced picture of the workforce and how it has fared.
He found that the 1980s boom, which gained traction in the middle of the decade, boosted the wages of all but the oldest group of workers. So large, steady income gains characterised the average household whether they were headed by men or women, or by people with high school diplomas or college degrees, whatever their ethnicity.
As Shapiro said: “This evidence contradicts the narrative told by those who track the value of aggregate income from the 1970s to present the claim that most Americans have made little progress for decades.”
The momentum dissipated in the first Bush presidency between 1989 and 1993 and accelerated again in the Clinton years before running out of steam in the early 2000s
Then came the downturn. The second Bush era, under George W, was painful for almost all but twentysomething college graduates, who even survived the 2008 crash with barely a scratch, and was worst for those without a high school diploma. Shapiro says the least educated saw their incomes “devastated” after 2001.
“Across the three younger age-cohorts, the median income of households headed by people without high school diplomas fell an average of 1.9% per year as they aged through the 2002-2007 expansion; and over the entire period from 2002 to 2013, their median incomes fell by an average of 1.8% year as they aged,” the report says.
Between 2010 and 2013, households where the main earner had been aged 25 to 29 back in 1982 suffered even more if they quit education before going to high school. They lost 7.1% in income in each year as vast numbers either took a cut in pay, in hours or were made unemployed.
The rise and fall of the average workers’ wages documented in the report chimes with the business cycle and the trend in Europe, which followed a similar trajectory.
The average German worker made income gains through the same period before a deregulation of the labour market under the Social democrat Gerhard Schroeder brought about an effective freeze in wages from 2003.
In the UK, the chancellor at the time, Gordon Brown, reacted to the downturn by switching on the government spending taps. He introduced tax credits as an income top-up to offset the trend for flat or falling real wages. It was a policy that insulated British workers from a trend that clobbered Americans and to a lesser extent German workers.
Retelling the economic story of the 1980s, Shapiro says the US benefited from a mix of Reagan’s expansionary policies in defence and infrastructure and the collapse of commodity prices after the inflationary oil shocks of the 1970s.
George Bush senior was forced to cope with the borrowing hangover from the Reagan years before Clinton assumed the presidency.
It’s no surprise Shapiro is a cheerleader for the Clinton years, which he argues developed employment and productivity boosting policies that favoured women, minorities and low-income employees like no other time in recent history.
What happened after 2001 and Bush junior’s failure to protect workers from globalisation is something that the next president must address, he says. What he calls “the dark side of globalisation”, which was driven by China’s over-investment in export industries, sending oil prices soaring while still flooding world markets with cheap goods, is still with us.
Beijing’s shift away from export subsidies has sent oil prices dropping again, offering the west an opportunity, but unless government offer workers some insulation, the radical politics of Trump and Sanders will only gain ground.
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