Federal Reserve says your wages are too high

The Federal Reserve has declared that the reason for ongoing economic weakness is because wages have not fallen enough. Wages have been stagnant for four decades while productivity has soared, but nonetheless orthodox economists believe the collapse of 2008 has been a missed opportunity.

A paper prepared by two senior researchers with the San Francisco branch of the U.S. Federal Reserve Bank attempts to explain the lack of wage growth experienced as unemployment has fallen over the past couple of years this way:

“One explanation for this pattern is the hesitancy of employers to reduce wages and the reluctance of workers to accept wage cuts, even during recessions, a behavior known as downward nominal wage rigidity.”

The two Federal Reserve researchers, Mary Daly and Bart Hobijn, based their argument on the standard ideology of orthodox economists, writing:

“Downward rigidities prevent businesses from reducing wages as much as they would like following a negative shock to the economy. This keeps wages from falling, but it also further reduces the demand for workers, contributing to the rise in unemployment. Accordingly, the higher wages come with more unemployment than would occur if wages were flexible and could be fully reduced.”

A food line in Toronto in 1931; falling wages didn't work out during the Great Depression.

A food line in Toronto in 1931; falling wages didn’t work out during the Great Depression.

The “problem” of wages stubbornly refusing to drop as much as corporate executives and financiers would like is referred to as the “sticky wages” problem in orthodox economics. Simply put, this “problem” is one that orthodox economists, themselves not necessarily subject to the market forces they wish to impose on others, have long struggled to “solve.” You perhaps will not be surprised to hear that “government” is the problem. Consider this remarkable passage published on the web site of the Mises Institute, an advocate of the Austrian school of economics:

“Much of the alleged ‘stickiness’ of wages is due to government policies. … [T]he trouble stems from workers not being willing to take pay cuts. When the demand from employers drops, at the old wage rate there is now surplus labor — a.k.a. unemployment. Only when market wages drop to a lower level, so that demand once again matches supply, will equilibrium be restored in the labor market.”

Collapsing wages in the Great Depression didn’t help

According to this author, Robert P. Murphy, an “associated scholar” of the Mises Institute, failing to drive down wages is such a big mistake that it caused the Great Depression. He writes:

“After the 1929 crash, Herbert Hoover gathered the nation’s leading businessmen for a conference in Washington and urged them to allow profits and dividends to take the hit, but to spare workers’ paychecks. Rather than cut wages, businesses were supposed to implement spread-the-work schemes where workers would cut back their hours. The rationale for Hoover’s high-wage policy was that the worker supposedly needed to be paid ‘enough to buy back the product.’ … The idea was that wage cuts would just cause workers to cut their spending, which would in turn lead to another round of wage cuts in a vicious downward spiral.”

Herbert Hoover was not vicious enough! Although it was Hoover’s Treasury secretary, Andrew Mellon, who advocated the government “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate” so as to “purge the rottenness out of the system,” and not Hoover himself, the president did take hard-line right-wing positions. Michael Parenti, in discussing Hoover in his book History as Mystery, wrote:

“Like so many conservatives then and now, Hoover preached the virtues of self-reliance, opposed the taxation of overseas corporate earnings, sought to reduce income taxes for the highest brackets, and was against a veterans’ bonus and aid to drought sufferers. He repeatedly warned that public assistance programs were the beginning of ‘state socialism.’ Toward business, however, he suffered from no such ‘inflexibility’ and could spend generously. He supported multimillion-dollar federal subsidies to shipping interests and agribusiness, and his Reconstruction Finance Corporation doled out about $2 billion to banks and corporations.” [page 261]

Hoover’s concern for working people was demonstrated when his troops fired on veterans demanding payments owed to them and burned their camps. His laissez-faire policies led to manufacturing wages falling 34 percent and unemployment rising to about 25 percent by 1933. That collapse in wages did not bring better times; only the massive government spending to wage World War II put an end to the Depression. Such wage declines, in the real world, actually make the economy worse, argues Keynesian economist Paul Krugman:

“[Y]ou could argue that a sufficiently large fall in wages could restore full employment now — but it would have to be a very large wage decline, and the positive effects would kick in only after deflation had first driven just about every debtor in the economy into bankruptcy.”

How many formulae can be written on the head of a pin?

Although orthodox economics is often nothing more than ideology in the service of capitalist elites, its practitioners like to believe themselves scientific because they base their theories on mathematical models. Unfortunately, these formulae are divorced from the real, physical world; the economy and the human behavior that animates it are not reducible to mathematics.

Robert Kuttner, a heterodox economist, explored these shortcomings in an article originally published in Atlantic Monthly. He wrote:

“The [prevailing] method of practicing economic science creates a professional ethic of studied myopia. Apprentice economists are relieved of the need to learn much about the complexities of human motivation, the messy universe of economic institutions, or the real dynamics of technological change. Those who have real empirical curiosity and insight about the workings of banks, corporations, production technologies, trade unions, economic history or individual behavior are dismissed as casual empiricists, literary historians or sociologists, and marginalized within the profession. In their place departments are graduating a generation of idiots savants, brilliant at esoteric mathematics yet innocent of  actual economic life.”

That was written in 1985; little if anything has changed since and arguably has gotten worse. Professor Kuttner points out that the very fact of persistent unemployment contradicts the basic theses of orthodox neoclassical economics. If the belief that markets automatically reach equilibrium were true, then wages would automatically fall until everybody had a job. Rather than acknowledge the real world, orthodox economists simply declare involuntary unemployment an “illusion,” or claim “government interference” with the market is the culprit. “Business cycles were around long before trade unions or big-spending governments were,” Professor Kuttner noted.

Wages are not as flexible as orthodox ideology suggests because within an enterprise preference is ordinarily given to existing workers to fill job openings, thereby buffering wages from external market forces, writes another heterodox economist, Herbert Gintis. In an essay originally appearing in Review of Radical Political Economics, he wrote:

“In particular, there is a tendency for the number of individuals qualified for a position to exceed the number of jobs available, in which case seniority and other administrative rules are used to determine promotion. Hardly do workers compete for the job by bidding down its wage.”

In almost all cases, employees do not even know what wages their co-workers are earning. This top-down secrecy facilitates the disparity in wages, whereby, for example, women earn less than men. If everybody earned what they were worth, there would no such wage disparity. The very fact of disparities between the genders or among races and ethnicities demonstrates the ideological basis of orthodox economics, which assumes that employees who do the work of production are in their jobs due to personal choice and wages are based only on individual achievement independent of race, gender and other differences.

You produce more but don’t earn more

Back in the real world, wages have significantly lagged productivity for four decades; thus, wages, examined against this benchmark, have significantly declined for those four decades. A study by the Economic Policy Institute, written by heterodox economist Elise Gould, reports:

“Between 1979 and 2013, productivity [in the U.S.] grew 64.9 percent, while hourly compensation of production and nonsupervisory workers, who comprise over 80 percent of the private-sector workforce, grew just 8.0 percent. Productivity thus grew eight times faster than typical worker compensation.” [page 4]

(Graphic by Economic Policy Institute)

(Graphic by Economic Policy Institute)

Middle-class U.S. households earn $18,000 less than they would had wages kept pace with productivity, Dr. Gould calculates. Nor is that unique to the U.S.: Wages in Canada, Europe and Japan have also fallen well short of productivity gains. Canadian workers, for example, are paid at least $15,000 per year less than they would be had their wages kept pace.

To circle back to the San Francisco Federal Reserve paper that began this discussion, the authors claim that wage stagnation will persist until markets “return to normal.” They assert:

“[T]he accumulated stockpile of pent-up wage cuts remains and must be worked off to put the labor market back in balance. In response, businesses hold back wage increases and wait for inflation and productivity growth to bring wages closer to their desired level.”

But as we can plainly see, and as those of us living in the real world experience, wages cuts have been the norm for a long time. The caveat at the end of the paper that it does not necessarily reflect the views of the Fed board of governors should be noted, but the paper was issued as part of a regular series by the San Francisco Fed and the authors are senior members of it, so it is not likely to be at variance with opinions there. It certainly does reflect orthodox economic ideology. Similarly, the argument by the Austrian School’s Mises Institute, stripped of its academic-sounding veneer, is a call to eliminate the minimum wage.

Stagnation, declining wages and the ability of capitalists to shift production around the globe in a search for the lowest wages and lowest safety standards — completely ignored in the orthodox hunt for economic scapegoats — are the norm. Our need to sell our labor, the resulting reduction of human beings’ labor power to a commodity, and the endless competitive pressures on capitalists to boost profits underlie the present economic difficulties.

Collective bargaining through unions and the needs of capitalists to retain their employees can be brakes against the race to the bottom — what the orthodox economists at the Fed and elsewhere are arguing is that these remaining brakes be removed and wages driven down to starvation levels. That is what global capitalism has to offer.


27 comments on “Federal Reserve says your wages are too high

  1. Superb post.

    “That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.” ~Aldous Huxley

  2. […] Federal Reserve says your wages are too high […]

  3. Tom Welsh says:

    Despite their remarkable productivity, I suppose downward wage flexibility ought to apply to economists too. Why am I so sure it doesn’t, for some reason?

  4. Bob the knob says:

    It is necessary to keep the cheerleaders well fed, healthy, and robust. The juggernaut of capitalism sails on a sea of ignorance and disinformation. Those cheerleaders are absolutely required to keep the masses in that state, and to justify the grandest of larcenies in their eyes.

  5. SD, please don’t take offense, but I started to doze when I reached this point “Although orthodox economics is often nothing more than ideology in the service of capitalist elites, its practitioners like to believe themselves scientific because they base their theories on mathematical models” and so my comment probably will not make any sense and I do so want to support your blog because it is quite interesting and truly intellectually superior to many, heavy, though it is.

    Here is my take on what I was able to stay awake long enough to read. It is an outright lie that when wages are perceived to be too high, that cutting them across the board will achieve less unemployment when it has been proved, by the Great Depression, that this was not so. Many orthodox economists have their own theory on how to keep the economy going and Hoover resorted to some nasty tactics of screwing over the American people as he touted the need for resourcefulness as opposed to social programs but had no problem in providing welfare for corporations. If the worker does not make enough to buy the product that he/she has worked to produce, then the economy takes a hit and grinds to a halt.

    Government intervention is seen as a bad thing because businesses should be allowed to decide what is what and if business agrees that wages should be cut, then wages should be cut. If businesses decide they need welfare, then and only then should welfare be applied as corporate welfare helps the economy. This is a lie but when you’re benefitting from the lie, who cares? The workers need to take a massive pay cut and then promptly starve to death since this is the best scenario that global capitalism has to offer.

    Basically, economists, orthodox or otherwise, are assholes.

    And that, SD, is my take on this one.

    Thank you for another great blog!

    • Shelby, I have never known you not to make sense. I’ll take your critique as constructive. In my own defense, it can be difficult to make economics “light.” It is a “heavy” topic, generally made more obtuse as the rest of us will zone out and not pay attention to what is happening around us. I’ll keep trying to make it understandable, because it is understandable.

      I think you have summed it up well, but I will have to disagree with the assessment of the “otherwise” economists. We need not go back to Karl Marx or Rosa Luxemburg; there are many economists doing excellent work today. There are the folks at Monthly Review, including John Bellamy Foster and Rick McChesney; there is Rick Wolff; David McNally; Samir Amin; Susan Watkins; Immanuel Wallerstein; and many more.

      Those names are just off the top of my head. We should be careful to distinguish between the orthodox and the others. Heterodox economists are decidedly the minority, but they are there, and describing the world accurately.

    • Alcuin says:

      If you read and study this passage from SD’s post, it will be most helpful. It is straight out of Marx:

      “Stagnation, declining wages and the ability of capitalists to shift production around the globe in a search for the lowest wages and lowest safety standards — completely ignored in the orthodox hunt for economic scapegoats — are the norm. Our need to sell our labor, the resulting reduction of human beings’ labor power to a commodity, and the endless competitive pressures on capitalists to boost profits underlie the present economic difficulties.”

      And yes, I agree with SD about the relevance of Marx, Amin, Wallerstein, and other heterodox economists. Veblen is another great economist to read.

      • Thank you Alcuin! My problem is that I just cannot get my head out of a mystery/suspense novel long enough to read anything by an economist. What I should have done is kept my stupid comment to myself. I realize that I am among learned individuals here and by posting a comment, I am displaying just how stupid I really am. My apologies to all!

        • Alcuin says:

          Oh, please!! Your comment was neither stupid nor do I count myself among the “learned individuals” here. We all got to where we are by being curious and reading. You have a good grasp of the fundamentals – it would just be helpful if you went to the source for confirmation. Marx is not an easy read, but Amin, Wallerstein and John Bellamy Foster are not difficult. Karl Polanyi is another author to check out. The Monthly Review isn’t difficult either and it is available online. I started reading SD’s blog when it was first getting off the ground and found a wealth of explanations and suggestions on how to tackle the subject. If you do nothing else, I’d suggest that you start at the beginning of his blog and read his posts – he is an excellent writer and teacher. The resources are out there to fill in the gaps in your knowledge, of which I have many, so happy hunting! Economics really isn’t all that difficult to understand – it is the orthodox economists who make it difficult by all of their posturing. Read SD’s early posts – you’ll find a wealth of links and suggestions of books to read.

          • Thanks, Alcuin! Indeed, this is all understandable once we cut away the obtuseness of how orthodox economics is presented. None of start out knowing this material; we learn it by finding people who are learned and capable of writing/speaking clearly about it and studying them. I continue to do this, and I hope I always will.

            Shelby, please don’t stop commenting. Your responses are intelligent and valuable to the discussions. The most important thing is for us to open our eyes, observe what we see, draw the obvious conclusions and act on them. The rest, including reading and studying, is filling in the details. It is the people who refuse to see, refuse to observe, refuse to understand who become part of the problem. Those are the people who should apologize, not you!

    • Alcuin says:

      Shelby, I visited your blog and it is obvious from the posts that I read that you are a talented, sensitive and creative person. Such personalities often suffer the most from the injustice that is part of the human experience. I really believe that if you undertook the journey to understand exactly what capitalism is and how it works that you would see the world in an entirely different way. While I understand the passion that produces the rants that you write (I was once in the same place that you are), please understand that those you rail against do not hear you. The only person who suffers is you, not them. One of the many wise observations in the many varieties of 12 step programs is this one: “We may think we can change the things around us according to our desires, but when a solution does come, we find it was our desires that had changed.”

      I’m sure you know the Serenity Prayer:

      God, grant me the serenity to accept the things that I cannot change
      The courage to change the things that I can
      And the wisdom to know the difference.

      It is unlikely that you will be able to change capitalism but if you understand what it is and how it works, I promise you that your desires will have changed. Will you still see injustice? Absolutely. But your reaction to injustice will change, perhaps in a way that will enable you to take some small steps to ameliorate a few instances of it.

  6. The obvious place to start is by cutting the salaries of the Federal Reserve and the Wall Street banksters they represent. That will free up an immense amount of money to stimulate the economy.

  7. tubularsock says:

    Wow SD, great post. Tubularsock is hesitant to delve into all this because Tubularsock has left his hip-boots at the White House and whenever economists are mentioned Tubularsock knows it is going to get THICK.

    But just a note of understanding has come forward for Tubularsock at least. The Federal Reserve of San Francisco has been reluctant to remove the concrete barriers that are set up around its perimeter to prevent terrorists from ramming a truck bomb into the building.

    Now, Tubularsock knows why!

    • Not too far from there is the TransAmerica Pyramid building, which I recently learned is on a block that was once home to artists, galleries, and where the Beats read. Now it is a phallic monument to capitalist excess. I hope City Lights Books gets to stay; I notice there are no concrete barriers in front of it.

  8. Norman Pilon says:

    Great work, here, SD. I hope you don’t mind if I reblog some of your posts from time to time. Not that I get a whole lot of traffic, but if only a few more individuals are exposed to your splendid work, it will have been worth it. Clarity and cogency of expression on otherwise complicated issues is a rare gift. Glad that somehow or other I discovered this blog.

    • Thank you for such kind words, Norman. Please do reblog as you see fit. The more all of us can do to get alternatives to corporate ideology out there, the better. We can’t create a better world unless we understand the one we are living in.

  9. Fran Meyers says:

    Insightful article. Not only are production workers at risk for failing wages, but those in education and the service sectors of the economy, many of which are unionized. Senior teachers are targeted regardless of the success in teaching — we are not considered teachers — but high budget items. The law suits against tenure — if won, would in one fell swoop destroy these unions overnight. And they are perverting the use of “civil rights” to claim that children from poor communities are being deprived of an education because of tenured teachers. Pensions and living wages would be a thing of the past in these sectors, as well.

    • The attacks against teachers, and public-sector workers in general, is becoming more intense. And these are always preludes to further attacks on private-sector unionization. Extreme right Wisconsin Governor Scott Walker, who receives his marching orders direct from the Koch brothers, has just mounted a direct assault on private-sector unions, the logical move (for him) after weakening public unions.

      And all this is in concert with the corporatization and privatization of public schools, through the charter school movement. My experience with teachers is that they are very dedicated, yet they are always among the first targets of the far Right. We really do have to understand that an attack on one is an attack on all.

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