My guest today is John Schmitt, research director at the Washington Center for Equitable Growth , a non-partisan research and grant-making institution. He is also co-author of the piece, "Don't Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality." Welcome to OpEdNews, John.
JB: President Obama just gave his last State of the Union speech and you have a bone to pick regarding his statement about income inequality. Let's start at the beginning. You do agree that we suffer from that condition, correct?
JS: Yes --we have experienced an enormous increase in economic inequality since roughly the end of the 1970s. You can see that increase along almost every dimension that economists measure. The difference between wages at the top and bottom has risen dramatically. The differences in family incomes --which include wages, but also other forms of incomes such as stock returns-- have grown even larger. The inequality of wealth --the total value of assets owned, such as a real estate, stocks, and bonds, minus any debts owed such as mortgages, credit-card balances, and student loans-- is worse than wages and incomes and it is also way up. So, the president is right about that, but where I disagree in an important way is with his explanation for why inequality has been rising.
JB: Okay so far. You and the president agree about the basic income inequality. That's the easy part. Can you tell me and our readers why that inequality has worsened?
JS: The core reason for the long-term increase in inequality is the decline in bargaining power for workers in the middle and the bottom. In the 1970s, before inequality started to rise, almost one fourth of the workforce was in a union, today it's half that and only about 7 percent of workers in the private sector. The minimum wage was also much higher then than it is now, even though the economy is much more productive now than then. We've privatized many state and local activities, putting downward pressure on wages and benefits. We've deregulated industries such as trucking and airlines, greatly reducing the quality of jobs in those sectors. We've signed trade deals that put middle-wage workers especially in direct competition with low-wage workers in other countries. All of these policies and more reduce the bargaining power of workers at the middle and the bottom relative to those at the top and that is what is driving inequality.
The President alluded to some of this when he said that it is "boardrooms" where the decisions about wages are decided. But, that was largely an aside in the speech. He did not tell the full story and we need to know the full story in order to turn things around.
JB: With the weakening of the unions, workers have lost their champions and, in many cases, their jobs and whole sectors altogether. I get that. What else do we need to know "in order to turn things around," as you put it? Also, do you believe that President Obama didn't tell the whole story for any particular reason? Do you think it's possible that he simply doesn't understand the whole story either?
JS: The key is to take actions that raise the bargaining power of workers at the middle and the bottom, relative to those at the very top. In the short-run, the single most important action economic policymakers could take would be to use monetary and fiscal policy to return the economy back to full employment and keep it there for several years. When jobs are scarce, workers have very little bargaining power. They have to settle for whatever job they are offered, whatever the wages and benefits. But, when demand for workers is high, and employers have to scramble to find workers to fill orders or staff counters, then workers have a lot of bargaining power. Employers have to compete to attract and retain workers. We saw this in the second half of the 1990s, when the unemployment rate went to five percent and then to four percent and remained there for a couple of years. That is the only time since the late 1970s when workers at the bottom experienced any significant wage growth.
There are additional ways forward, all of which have an element of strengthening the bargaining power of workers or weakening the bargaining power of employers. To highlight two of them: the local, state, and national level movements to raise the minimum wage and organized efforts to rein in the financial sector through a financial transactions tax and related reforms.
Why doesn't the President tell the whole story? I'm not a mind reader, so I can't say. But, the whole story does involve challenging powerful economic interests, including ones that have important influence within his own party.
The good news is that President Obama, like any sensible politician, has shown that he will respond to sustained pressure. On the minimum wage, for example, a couple of years ago, he announced his support for a $9 per hour federal minimum wage, a decent increase from its current $7.25. Only a few months later, under pressure from activists, activists, progressive economists, and Congressional Democrats, he upped his number to $10.10. More recently, as campaigns for much higher minimum wages has spread, especially at the state and local level, the President has come out in favor of a $12 federal minimum. He's not at $15 yet, and he might not ever get there for the national level, but that is tremendous movement over the course of only two years --all in response to political organization.
JB: Agreed. And kudos to Seattle, San Francisco, San Jose and many other cities, that have stepped up. What happens when municipalities raise the minimum wage or commit to doing so? Have the dire predictions come true in terms of job loss and other metrics?
JS: Many of the cities that currently have plans to increase the minimum wage are aiming for levels that are above where we have historical experience of the minimum wage. So, we can't be sure beforehand exactly what the impact will be. In almost every case, though, the increases are being phased in over several years, which will help employers to adapt to the new, higher wages.
As the higher minimum wage is phased in, I would focus on two things. First, the benefits to workers who receive pay increases are very large. Even if the level of employment falls off, minimum-wage increases can have very large positive effects for the large majority of low-wage workers, who will be receiving substantial pay increases. These benefits will carry over to their families and their communities. As with any policy, we want to weigh benefits and costs.