Wage Decline: No Mystery Whatsoever
 

Real wage decline has been described as a mystery by many financial analysts. In fact, there's no mystery whatsoever. Current real wage decline is the result of some basic economic factors. The apparent "mystery" is caused by the miscalculation and misapplication of these factors in today's economy. The 1st first factor is the miscalculation of unemployment which distorts true labor force size. This distorts the true supply and demand factors. The 2nd factor is the overestimation of the "sticky wage" effect on today's employment picture.

The calculated unemployment has been kept lower than its true number by statistical chicanery. Under Bush a much greater number of unemployed workers have been re-classified as "not in the labor force." As such, they are not counted as unemployed and their exclusion greatly reduces the alleged unemployment rate. This number has grown twice as fast during Bush's 5 years as it did during Clinton's last 5 years.

More specifically, since Bush took office the number of working age workers "not in the labor force" has increased 7 million. This is in contrast to an increase of only 3.5 million during Clinton's last 5 years. Had the number of workers "not in the labor force" increased at the same rate as they had under Clinton, the true number of unemployed workers would be 10.5 million, instead of 7 million as the Bush administration claims. This increase would result in an unemployment rate of 7.3%, not 5.0% as is currently claimed. (The unemployment rate of 5.0% comes from dividing the alleged 7 million unemployed workers by the total number in the "participating" labor force of 141 million. If 3.5 million more workers are added to the unemployment number, the number of unemployed becomes 10.5 million. Dividing 10.5 million by 144.5 million {141+3.5} gives an unemployment rate of 7.3%)

Below is a chart of the "Not in the Labor Force" numbers.
http://img.villagephotos.com/p/2005-...abrFrcGrph.gif

The Bureau of Labor Statistics link for the "Not in the Labor Force" figures can be found at: BLS


The number of the working age population considered "not in the labor" has increased almost twice as fast as the population growth, as well as the growth of potential workers. The total population increase per year is approximately 1.1%. The same is true for the anticipated growth of the working age population. The same increase would also be expected in the growth of the "participating" labor force. Thus in 5 years the labor force should increase about 5.5%. And those not in the labor force should increase by the same amount.

This was exactly the case during Clinton's last 5 years. During that time, the population considered "not in the labor force" increased from 66.997 million to 70.488 million, or roughly 5.5%. In contrast, the increase in those "not in the labor force" under Bush increased from 70.488 million to 77.028 million, or about 10%. As such, the number of the working age population that allegedly dropped out of the work force under Bush was double that of Clinton's last 5 years. Does this really make any sense, if an economy is "strong, and getting stronger"? Should more people actually be dropping out of the work force?

Obviously a larger pool of workers drives wages down, as an increased "supply" of anything drives "prices" downward. In this case, the "price" is workers' wages. If the increase in workers seeking employment exceeds job growth it puts downward pressure on wages. This is exactly what's happened under Bush. Jobs have been created at a MUCH slower rate than the increase in the size of the labor force. The exclusion of 3.5 million truly unemployed workers from the reported unemployment number has made the calculated unemployment rate deceptively low. This deception has obscured the major source of wage stagnation -- the "supply" of workers is increasing faster than the "demand" for workers.

The effect of "sticky wages" has also been overstated. The general theory is that wages will not decline as fast as the true demand for workers declines. This is attributed to a number of factors, such as labor contracts, unwillingness of workers to accept wage cuts, and unwillingness of employers to risk losing current employees. However, there are a number of reasons why this has less application than previously.

There has been a much greater rate of job turnover than in the past. This causes many employees to be new hires. New hires have much less wage-bargaining power than long-term employees. Simply shifting the balance of employees from long-term hires to new hires reduces the "sticky wage" effect.

There has been a tremendous decline in the influence of labor unions, and their ability to negotiate wage increases for their members. A much smaller percentage of workers are unionized than in the past. In addition, many companies have successfully negotiated wage or benefit reductions with their current employees. This is something that was extremely rare in the past, but has become quite common today. Further bolstering businesses ability to reduce wages is the constant threat of bankruptcy of many businesses, and the complete loss of income if workers don't accept pay cuts.

The threat of job loss to foreign workers has also driven wages downward. Though employers may not directly threaten employees with the outsourcing of their jobs, the implied threat is always present. It has become apparent to most American workers that almost any job can be outsourced, and that workers had better not "price themselves out of the market," and make their company "less competitive." Many workers are completely aware of the ongoing effects of NAFTA and the anticipated effects of CAFTA. Workers are simply tolerating wage reductions at present, when they never would have done so in the past.

Thus, the increased supply of workers to jobs and the diminished effect of "sticky wages" has resulted in real wage decline. There is no mystery here. Wage decline has been caused by simple labor supply & demand effects, coupled with a reduced "sticky wage" effect.

unlawflcombatnt
EconomicPopulistCommentary
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The economy needs balance between the "means of production" & "means of consumption."

Pretty good post - covers the issue nicely.

Only missing the fact that governments have a long history and a vested interest in 'cooking' the numbers where ever possible.

As for the 'mystery' that only exists for the supply-side people who are the ones that provided the theoretical basis for Bush's tax cut policy. To them, there is a 'mystery' because the results predicted by their theory hasn't occured. To them, that is a 'mystery'. To everyone else, there is no mystery here at all.

Unfortunately, what the report glosses over is that the wage decline (17-30%) for American workers has been going on since 1973.

See 'The Myth Of Free Trade' by Ravi Batra, as he was the first economist to poiint out this never-before-seen disease.

Beat me to it.
It began in the early-mid 70's...rose significantly through the 80's...and paramounted in the late 90's.
This is the first generation since the depression where people are making less money than their parents generation performing the same job for the same companies. - and this is not adjusted figures - it is actual dollars per hour.

Funny how the press is never allowed to impart that info, nor the fact that this correlates 100% with the drop in our tarifffs in 1973, which ushered in our free trade era.

This is exactly why most people do not think the economy is doing well. You hear all these reports about how the economy is doing great and profits are up but the public just doesn't seem to have much confidence in the economy. This is why. The economy is doing great if you are a CEO or invest large amounts of money in big companies. For average Americans the economy isn't doing good at all.

AB SO LU TE LY
Just as I said in another post in a different thread...our economy is a bubble. We used to have real-tangible revenue based on goods and services...now the "good economy" is "sudo" revenue based on investments, with alot of those foriegn investments.
If something drastic happens America will be in serious, serious trouble. We no longer have the vast manufactoring capabilities we once had..it is scattered all over the world.

I also find it strange that, even with these lower wages, more and more jobs are being sent overseas by American companies who complain that they cannot compete.

Because the minimum wage in the US is $5.15/hour.

In China, the wage (when there is a wage at all) is approx $0.70/day.

Do the Algebra and see what is cheaper.

Ain't this the truth. I saw on the news that a Mattel ceo was terminated today and will receive (I think it was, I can't find the article to confirm right now) $5 million right away which is 3 times what his salary was, plus an annual income (I think it was close to $750,000/year) plus other benefits. This is why these companies need to outsource, they have to take care of those they fire (imagine what they get when they retire?)

Since I could not find the proper link here is one that provides similar information.

here

And keep in mind when reading these that this article is from 2001. What would the equivalent value be in today's money?

It is sad when our companies are not willing to pay $5.15 an hour even. Are you saying that we should get rid of the minimum wage so our companies can pay American workers $0.70/day to compete whith China?

No.

As I'm an American worker, I do not want that at all.

However, that is our future, as Mr Gould of Barron's said himself.

Contrary to that corporate stance, what is needed is rescinding of GATT, NAFTA and all other free trade agreements, the re-establishment of bilateral trade, and a universal tariff of at least 60%.

However, as long as the corporations own our government (Republican and Democratic Parties alike- read Kevin Phillips 'Wealth and Democracy') that will never happen.

Guess I should have used a [sarcasm] tag.

That is exactly my point. North Americans (Canada included) complain about jobs being outsourced for less money yet we are always the ones demanding a lower cost of products. These companies need to please their CEO's, shareholders, clientele and lastly their employees. So long as we support them by buying their products we are encouraging them to reduce costs using whatever method possible.

Canada has had to deal with this more than the US however. For decades we have been shipping raw materials to the US and we have been buying back finished product instead of completing the cycle domestically.

I guess it is a cycle. Wages go down and jobs are moved to other countries so their are more people that have to find the cheapest products possible which encourages companies to cut cost which means even lower wages and more use of sweat shop labor abroad.

I don't know much about economics but that is pretty much how I understand it.
My question to someone who is into economics is "Is this a correct conclusion? and if so when and how does it end?"

Problem with your anaoloy, gents is that 'consumers' and 'workers' correlate at about the 80% level.

FYI, you can get about a 50% swing on questionaires about free trade from the public depending upon how you ask the questions.

What this says is that Americans are dumb on this issue, as they are on many others.

And a censored media ensures they'll remain that way.

Also, as mainstream economists have a laughable rate of correct predictions in the real world (See US history 1880-1929), you can safely disregard anything those clowns say.

Point of order:

You gave not so much of a true analogy, as a flawed overview in your explination.

Just to specify.

What really amazes me about this thread is that it's subject has more impact on Americans lives than most issues discussed on this site yet nobody is really debating it and it isn't all that active other than with a few members. This probably has to do with the fact that many American members tend to be republicans and their policies tend to facilitate this trend yet they can't really argue with the fact that it is happening. Then again I do not see democrats accomplishing anything that would help to reverse this trend.

That is because the Democratic Party was the victim of a hostile takeover (buyout) by corporate America- circa 1992.

You really oughta read Phillips' book to understand the process.

Please don't take this as the beginning of a disagreement but could you explain why it is flawed. I would really like to understand it better. Thanks.