An Econ Mystery: Why Did Wages Flatline?

The latest jobs report shows full employment but it hasn’t brought workers higher pay.

 Over the past year average hourly earnings have risen by 2.5%. Unfortunately, the consumer-price index, a standard measure of inflation, rose by 2.4%, meaning the average worker’s purchasing power hardly grew at all.
.. Since 2010, hourly wages corrected for inflation have risen at barely 0.5% a year. The official statistics back up reports that Americans are working harder than ever just to stay even.

Since the depths of the Great Recession, household incomes have increased steadily—not because wages are rising, but because Americans are working more hours. A longer view reveals the limits of these gains. Nearly eight years after the official end of the recession, median household incomes aren’t much higher than they were when the recession began, and they remain a bit lower than in January 2000. For families in the middle, it has been a lost two decades.

.. Productivity gains have been meager since the end of the Great Recession. But as this newspaper reported last week, profits at S&P 500 companies in the first quarter of 2017 were up nearly 14% over the comparable period a year ago. Firms have gains they could share with their workers, but they have chosen not to do so. Even in occupations where companies complain of labor shortages, there is scant evidence that they are responding by raising compensation.

The Center Holds

Emmanuel Macron was elected president of France on Sunday in a victory for a political newcomer who campaigned on promises to revamp France’s heavily regulated economy and fight a tide of nationalism sweeping the European Union. The 39-year-old former investment banker has vowed to undertake contentious changes to labor markets in France as part of a push for greater economic convergence among the EU’s fractious member states. At the core of his program are overhauls of France’s sluggish economy and the eurozone, with all its shortcomings. To get what he wants, he will first have to convince a skeptical Germany. Mr. Macron won 66.1% of the vote, surpassing pollsters’ predictions that he would win about 60%. Marine Le Pen, who ran on a plan to pull the country out of the euro and close its borders to migrants, took 33.9%. The euro briefly touched a seven-month high against the dollar after the results.

Where Trump Sees Economic ‘Disaster,’ Experts See Something More Complex

To be sure, there are some very real shortcomings that Mr. Trump identified in his campaign. They include minimal pay growth for less-skilled workers, near-record numbers of Americans not in the labor force, and disappearing factory jobs. Still, many mainstream economists say that the Trump agenda — aimed at lowering taxes, peeling back regulations and reopening trade deals — will not alter those trend lines.

“Tax cuts are unlikely to boost labor participation rates, nor will they reverse the aging of the population,” said Michael Gapen, chief United States economist at Barclays. “Less regulation could have a positive impact on long-term growth, but it is unlikely to move the needle over the next two years.”

.. As on many issues, Mr. Trump has sent conflicting signals on this subject, suggesting at times during the campaign that state increases were justified, but warning in primary debates that wages were “too high.”

.. But while the positions Mr. Lawrence is filling are middle-class jobs in Sioux Falls — they start at $45,000 to $50,000 a year, plus benefits — all require a college degree or other technical training.

.. “Stronger growth will help with the low participation rate, but what it’s not going to do is help workers who have been left behind by a lack of education or training,” Mr. Behravesh said.

.. “This is where I have trouble with Trump,” Mr. Behravesh said. “A lot of those manufacturing jobs are gone forever. He is raising expectations, but it’s not going to work. Even if they don’t go to Mexico, a lot of jobs will be automated out of existence.”

.. Mr. Behravesh is looking for the economy to grow by 2.3 percent this year, up from an estimated 1.6 percent annual pace last year. Growth could reach 2.6 percent or higher in 2018, but is very unlikely to hit the target of 4 percent growth that Mr. Trump outlined during the campaign.

Growth Can Solve the Debt Dilemma

Hitting a 3% target would result in an economy that’s nearly $13 trillion larger in 30 years.

 But consider what happens to the CBO’s numbers assuming 3% annual growth. By 2040 the economy would expand not to $29.9 trillion, but to $38.3 trillion, according to an analysis by Research Affiliates, a California investment firm. That’s an additional output of $8.4 trillion—roughly the entire annual production today of every state west of the Mississippi River.

By 2047, the economy would grow to $47.1 trillion, almost $13 trillion more than the CBO’s baseline estimate. That would spin off new tax revenue to Washington of about $2.5 trillion each year.‎That money ought to be more than enough to pay all the bills and cover most of the unfunded costs of Social Security and Medicare. The old saying is right: The most powerful force in the universe is compound interest.
.. Many blue-chip economists agree with the CBO that a growth rate of about 2% is the best that America can achieve.
.. But the right policies can counter these trends. Productivity should surge with improvements in robotics, artificial intelligence and automation. Self-driving cars could cut transportation costs dramatically in coming years. Washington could facilitate this renaissance by giving companies an incentive to invest.
The Tax Foundation predicted last year that the House Republican tax reform alone would raise wages by 8%, GDP by 9% and capital investment by 28%.
.. at least seven million Americans in their prime working years—18 to 65—would be on the job today if labor-force participation had not dropped since 2000. A strong economy, paired with welfare reforms, could draw millions back to work.
.. And immigration is America’s natural demographic safety valve.