A generational effort is required to restore growth in U.S. wages.
Despite the sincerity of their sentiments, Democrats will fall flat in efforts to provide a structural solution to wage stagnation in the United States until they undertake a generation-long effort at educating voters.
That effort should be framed around closing the international wage gap – i.e., the growing disparity between prevailing wages in the United States and its peer economies. Wages are a toxic topic for Republicans, but the opportunity is there for the taking by Democrats. It offers a partisan advantage. As a campaign issue, the international wage gap would dramatize a Democratic economic agenda that systemically links wages to economy-wide productivity growth. It would pose a compelling contrast to tired or even fallicious supply-wide Republican policies.
What is the international wage gap?
U.S. Bureau of Labor Statistics data document that manufacturing wages in 13 other rich democracies in 2012 exceeded U.S. wages, many by $10 an hour or more, adjusted for exchange rates. Here are the data (hourly employer compensation costs including wages, government fees):
United States: $35.67
This gap has arisen because a hefty portion of rising productivity in these peer nations is added to wages each year, producing steady if unspectacular income growth that exceeds inflation. That is not the U.S. system and these results display the consequence.
Closing or even stabilizing this wage gap will not be an easy policy position, to be sure. Such a move will meet fierce resistance by U.S. high earners receiving most of today’s gains from growth. Their allies among Republican lawmakers will also be opposed and will continue to use arcane U.S. Senate rules to block any major Democratic efforts, even if Democrats re-capture the chamber.
Moreover, the instrumental role of private money in U.S. politics ensures vigorous Republican opposition. And they may be joined by some number of Democrats even if that party adopts the position widely. That role is documented by U.S. policy outcomes that chronically reflect an income bias, as Martin Gilens and Benjamin Page recently concluded.
However, there could be support from surprising quarters, if Democrats carefully prepare legislation to narrow the international wage gap. For example, one strategy would be to promote and provide incentives for the Codetermination model of corporate governance as practiced in northern Europe. I have made this argument previously in The Globalist.
Such a strategy, actually imposed in West Germany by the U.S. and British occupation, features employee representatives on corporate boards and involving them more in decision-making. Not only has this been proven — not surprisingly — to lead to higher wages, but it has also paid off well for many German and other northern European firms, relative to their quarterly-profit-oriented U.S. peers.
Adding employees to corporate boards improves the performance of firms by featuring cooperation. And it is the key to boosting anemic U.S. R&D and woeful corporate under-investment to match firms in nations such as Germany. While activist shareholders andCEOs seeking immediate gain would object, a number of U.S. corporate shareholders might well accept Codetermination that enhances long-term enterprise growth.
Empowering employees with worksite reforms is a useful starting point, as Larry Summers and other experts have recently advocated on both sides of the Atlantic. However, ensuring that real U.S. wages rise steadily year after year will require more, especially linking wages and productivity growth. If a company does very well for itself, some percentage of those profits reasonably should be translated into higher wages for employees, rather than merely being as now plowed into stock buybacks, dividends and executive compensation packages.
A generational challenge
Making that case, however, will be a generational challenge for wage advocates, including Democratic lawmakers.
Why generational? The Reaganesque division of gains from growth since the 1980s has de facto been achieved by making war on wages. And that pattern has become institutionalized. American history has shown that once even a damaging economic arrangement has been established, it is extraordinarily difficult to uproot.
Examples include the U.S. Constitution’s embrace of the slave economy built during colonial times, the Jim Crow era lasting nearly a century after the Civil War, and the employer-centered health care system whose reform was first propose in the 1940s.
Indeed, history teaches that such entrenched arrangements are only uprooted by unique circumstances – including a Civil War or a rare filibuster-proof progressive majority in the Senate. Medicare, Head Start, Medicaid, Obamacare, ending Jim Crow and Franklin Roosevelt’s reforms like Social Security were fruits of such once-in-a-generation circumstance.
That history means the next legislative opportunity to adopt structural linkages between wages and productivity, which are common in other rich democracies, could well be many decades away in the United States. And wages will continue to stagnate in the interim except for temporary episodic boomlets that trickle down to higher wages.
Groundwork to realize this generational agenda
Even then, it is not merely enough to have a filibuster-proof margin in the Senate after a landslide election born of general crisis. If a sweeping set of reforms is desired, voters have to be educated, ready and waiting.
We cannot know when the next moment of great opportunity will strike, but the interim time can fruitfully be utilized to lay the groundwork. This means education, activism and incremental steps for linking wages to productivity. Economists and the various centers studying corporate governance should devise a base of research, data, and analyses of the various systems in other rich democracies linking wages to productivity. Task forces, forums, think tanks, academics, advocates and activists must engage to provide the kind of energy that has inspired and mobilized mass reform movements before, such as civil rights and the environment.
This process is underway to some degree. For instance, Democratic Party legislators in California and in Congress have proposed tax incentives for the private sector to link wages to productivity or to CEO pay.
A key role must be played by state and local government leaders, in line with the U.S. tradition of using states and cities as smaller “laboratories of democracy.” They can provide invaluable proof of concept – as they have done repeatedly in the past in setting the national pace for environmental reforms, minimum wages and the like.
In doing so, they will also expand the share of the workforce where wages are linked to national productivity performance, further easing the transition when the time comes for national legislation.
It will take a generation to thwart the war on wages. There is no more time to waist.