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The Missing Wage Increases-- A Modern Non Mystery

A fiscal analyst, exhausted from searching endlessly for the missing American wage bump 

(IMG: thisoldhouse.com)

by Preston Clive

I read a fabulous piece this morning that addressed the issue of (now anemic) wage growth--an issue that is perplexing many economists trying to decide why it is that wage growth isn't being exhibited, when other indicators such as unemployment claims, market health, low interest rates (holding around zero for well nigh eons) etc aren't resulting in a bump in "non-supervisory" "non-managerial" workers' wages.

The subject is certainly on the national mind--I canned another article, posted this a.m. on realclearpolitics.com, which did its best to develop its thesis regarding what constitutes a good wage increase and what constitutes a bad wage increase.

Moving along with the fleshing out of the base thesis that wage increases are a precursor or natural threat of inflation--the idea being that if people start making more money, then by god the world of commerce is going to jump right in and help themselves to the increase they just gave them and raise prices--the author claims that this is not the full picture. The threat is always looming of the Fed raising short term interest rates which have been sitting around zilch for quite a time now--inasmuch as the Fed is seeking to negate inflationary pressures posed by wage gains. 

Not so fast says the writer: there are good wage gains and bad wage gains. Good wage gains, he states, are driven and offset not by raising consumer prices but increasing productivity--thus the buying power of the consumer is affected and the inflationary danger is avoided. He writes:

Greater efficiencies from investment, new technologies or better management practices reduce costs. Companies can use the savings to boost compensation without raising prices.

Over long periods (decades, not years), the translation of advancing productivity into higher labor compensation is the main path to higher living standards

The second way that companies can pay for wage increases without raising prices is,

for labor to gain at the expense of capital (or business, if you like). Put differently: Wages can squeeze profits. For years, the shift has been the other way. Profits have squeezed wages. From 1990 to 2014, labor's share of national income dropped from 63 percent to 57 percent, report economists at the Federal Reserve Bank of Cleveland. Of course, businesses won't voluntarily sacrifice profits. Competitive markets have to limit their ability to pass along higher labor costs. (emphasis mine, for a reason)

So there are good wage increases and bad. The good reflect better productivity; they permanently elevate incomes and living standards. The bad result in only temporary gains; they lead to higher price inflation that erodes the purchasing power of the earlier wage increases. In an ideal world, we would now get good wage increases that would bolster household finances and prolong the recovery.

So bad wage gains, he states, are a result of profits squeezing out wages--this has been the trend for well over three decades, as corporate profits have edged out labor by shipping jobs out of the country, fracturing labor unions, and hiring 1099 workers or staffing companies for whom union benefits and competitive pay are never in the mix.

I'd like to tie this article on good and bad wage increases for ordinary workers, inflation, and management in to the article I first linked above by zero-hedge, which basically illustrates and provides proof for what I've been yammering on and on about for quite a time now: the truth behind wages in this country and the lack of there being any real mystery as to the cause of their stagnation; any vague gains are offset by natural inflationary pressures, and the "reason" that wages are not boosting is as clear as the sky above our heads.

The article, which proclaims that "The Mystery of America's Missing Wage Growth Has Been Solved!"  

Using charts from the Bureau of Labor Stats and a handy calculator, the mysterious Mr. Durden speaks, regarding the 80% of our labor pool, constituting non-supervisory, average every day common workers:

As the BLS reports, not only is the annual wage growth of 80% of the work force not growing, but it is in fact collapsing to the lowest levels since the Lehman crisis! (meaning the 08-9 banking crash)

But if the wages of the non-working supervisory 80% of the labor population are tumbling while all wages are flat that must mean that the wages of America's supervisors, aka "bosses" are...BINGO!

(there) is your soaring wage growth: all of it going straight into the pockets of those lucky 20% of America's workers who are there to give orders, to wear business suits, and to sound important.

Yes - wages are growing, for those who least need said wage growth, the "people in charge."

In other words, precisely all those economists who day after day repeat that, damn what reality says, wages are rising.

Well, guess what: they are absolutely right... when referring to their own wages! It is the small matter of everyone else's wages that they are dead wrong about.

What was the mystery to be solved here? I've been proclaiming for eons that for the engine of the economy, the common man must be left with a few dollars in his pocket to spend out there in the world on this or that: this turns the wheels of the economy. But as corporate liquidity always goes in the service of profits and stock prices to feed the shareholder and the manager who enjoys fabbo bonuses, and as corporate salaries have exponentially, algebraically expanded and grown beyond all taste and boundary over the past 40 years, and as the common laborer has algebraically shrunken and/or stagnated over the same period (see the Death of the American Dream piece which itself is a rehash).

So to those who are peeking under lamps and tables, pulling up carpet edges, slithering on their bellies to look under their beds, searching, searching for the Little Wage Growth That Wasn't .  .  .  keep looking. You will live your whole life looking. There was a point there somewhere around the early Oughts, where corporate America and politicians had the following epiphany: "Wow .  .  . Not only do we have the power to do what we want--always have--but we can actually, really start truly Doing Whatever We Want!"

And with that corner turned--banking scandal here, S&P ratings public humiliation there--there's virtually no way back. That 80% is too powerless-in-the-moment, and the profits are too incredible, and make the occasional fine and public disgrace risk perfectly worth it.

The mystery was old news a long time ago.

Preston Clive

3/12/2015***