Today the latest Megatrends report was published, Have we seen the end of the pay rise? It shows that, since January 2009, average weekly earnings (excluding bonuses) have fallen in real terms by 7.8% if the Consumer Price Index (CPI) is used as the measure of inflation and by 10.2% if the Retail Price Index (RPI) is used instead. Analysis by the Office for National Statistics confirms this is the sharpest and most prolonged period of falling real wages since consistent data started to be collected in the early 1960s. But we would probably have to go much further back in time to find an episode comparable to now.The report also notes that, in the USA, average earnings for the median full-time worker are no higher now in real terms than they were in 1979, when data from the Current Population Survey first became available. By way of comparison, average weekly earnings in the UK were last below their current level in real terms in September 2003 (deflating by the CPI). If the average UK worker hasn’t had a (real terms) pay rise for 10 years, the average US worker hasn’t had one for some 35 years!So why have real wages in the USA stagnated for so long, and what does that mean (if anything) for real wages in the UK?One possibility is that the lack of movement in the whole economy figure is due to changes in workforce composition. If low paid groups increase as a proportion of the labour force, the average wage could stay unchanged even if all groups within it see an increase in their own group-specific average wage.One big change we have seen since the 1970s is more women in the labour force, and women tend to be paid less than men. The chart below shows that the median earnings of full-time women employees in the USA increased by 21% between 1979 and 2013, whereas the comparable figure for men fell by 8%. Yes, changes in workforce composition affect what happens to the whole economy figure but this is not a statistical mirage – median earnings have fallen in real terms for men.
More detailed data, breaking down the workforce by age and ethnicity and by education level, are available from 2000. The chart below shows that there was a tiny fall of $1 (or 0.3%) in real weekly earnings for the median worker between 2000 and 2013. Women of all ethnicities, however, saw median real wages increase as did (relatively low paid) Hispanic/Latino men and (relatively well paid) Asian men. Black/African and White men, however, saw median earnings fall in real terms.
More intriguing – if not perplexing – is that median earnings fell in real terms for all groups except those with an advanced (post-graduate) degree, where there was a very small increase. How is this possible if the whole economy figure was almost zero?This is where we need to remember that these data relate to median earnings – the point in the distribution where half the population earns more and half the population earns less. What we have seen in the USA – to a much greater extent than in the UK – is a widening of the earnings distribution. As shown in the chart below, the gap between those at the top and those at the middle has widened.
The share of total wages going to those earning the most has increased by more in the USA than it has in the UK. To compound this, as shown in the chart below, the share of total output (the economic pie) going to workers through wages and salaries has been falling in the USA whereas it has increased slightly in the UK since 2008.
While average earnings have continued to track labour productivity pretty well in the UK over the last few decades, there has been a “decoupling” in the USA, with a smaller fraction of productivity gains finding their way into pay packets, especially for those in the bottom four fifths of the earnings distribution. This means that the USA has seen an increasing share of GDP going to capital rather than labour. Some of this will have been kept as retained profits by businesses and the remainder will have been paid out as dividends. Of course, shares are owned by individuals either directly or indirectly (e.g. through pension funds) but some of those investors will not live in the USA and the distribution of capital income is likely to be different from the distribution of labour income. More income for capital might benefit groups such as senior executives (through share options) and retired people living off investments.So what’s behind these changes? To an extent, the economies of both the UK and the USA have experienced similar changes: technological change that has advantaged the skilled more than the less skilled; greater competition from overseas, especially in low labour cost markets, and offshoring of jobs; and a decline in union power (union density in both countries has halved since 1979).But there have also been differences. The USA has seen a much larger increase in the number of people with relatively low educational attainment (often immigrants) competing for low-skilled jobs. In the UK, the National Minimum Wage has, since 1999, set a wage floor of just under half median earnings whereas the Federal Minimum Wage has declined relative to median earnings (although supplements exist in some States). Social security coverage in the USA is also less comprehensive than in the UK, which makes it likely that lack of any alternative income is a stronger force pushing workers into very low paid jobs in the USA than it is in the UK.Both the USA and the UK have, from the late 1970s onwards, seen an increasing concentration of income and wealth among the very rich – the top 1% or even the top 0.1%. However, the extent of this concentration has been much greater in the USA than in the UK. About one fifth of all income in the USA goes to the top 1%, a level last seen in the Roaring Twenties. In the UK, it appears to be about one eighth. There are competing views on why this has happened, discussed in an accessible manner in a set of papers published in the summer 2013 Journal of Economic Perspectives.One view emphasises market forces. Changes in technology and globalisation mean that the gap in earnings power between “superstar” performers and good performers – let alone the average performer – has changed exponentially in many markets. Football (soccer) is now a sport with a global following. Thanks to satellite TV, fans all over the world watch the best players and the top Leagues. Sponsors follow in their wake. Hence Messi or Ronaldo possibly earn more (in real terms) in a year than Cruyff or Beckenbauer earned in their entire playing career. Digital technology means best-selling authors or musicians can quickly access enormous markets. Financial integration means that the most successful investors have bigger funds to play with and hence greater opportunities to make a return. The USA has a large and wealthy domestic market and is still the global technology leader in many markets, so it would not be surprising if many of these “superstars” originated in – or gravitated towards – the USA.The other view emphasises “rent-seeking”. In other words, people use money and power to secure even greater rewards for themselves and their families. So, for example, CEOs and senior executives use their control of companies to maximise whatever variables increase their compensation (such as short-term profit or share price movements) even if it damages the long-term future (or survival) of the company. Cross-membership of remuneration committees enables senior executives to bid each other’s pay up. And wealthy industry lobbies, such as Wall Street, use their influence to persuade politicians to adopt – or block, as the case may be – regulations that do not serve their interests, such as company regulation or changes in tax. The differences in political systems between the USA and the UK – in particular, the importance of fundraising for election to office and the greater separation of powers between Congress, the White House and the judiciary - would appear to offer more opportunities for rent-seeking in the USA.The factors concentrating so much income in the hands of those at the very top are no doubt at work in the UK, but probably not to the extent seen in the USA. Hence, if the UK can match the USA in terms of productivity growth – which cannot be taken for granted – then it is more likely that the benefits are dispersed to workers throughout the earnings distribution. Even so, if technological change continues to work to the advantage of the highly skilled, policy decisions about the level of the National Minimum Wage or the design of in-work benefits are likely to become ever more influential in determining the living standards of those with less earning power.
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