Here's Why Wages Have Stagnated (And Will Continue To Stagnate)

Tyler Durden's picture

Despite the claims by Obama, Clinton, and therefore the mainstream media, the continuing lack of reported wage pressures highlights the lack of quality in the job generation in America. As CLSA's Chris Wood details, lower paying jobs in the leisure and hospitality sector and the retail trade sector increased by 421,000 and 289,000 jobs respectively over the past 12 months, while the higher paying jobs in the information and utilities sectors increased by only 27,000 and 6,000 jobs over the same period...

 

And so, as Charles Hugh-Smith via OfTwoMinds blog explains, the only way to reverse declines in labor participation and stagnation in wages and demand is to make it easier to start enterprises and hire people.

Mainstream economists are mystified why wages/salaries are still stagnant after 7+ years of growth / "recovery." The conventional view is that wages should be rising as the labor market tightens (i.e. the unemployment rate is low) and demand for workers increases in an expanding economy.

But wages are only rising significantly for the top 5%, while workers between the bottom 81% who have seen their household incomes decline and the top 5% are experiencing stagnant earnings.

We can see how the top 5% have pulled away from the bottom 95% by examining household budgets: spending by the top 5% has soared compared to the stagnant spending of the bottom 95%.

In effect, productivity gains have accrued to the top 5%. This chart shows that while productivity has advanced, household income has remained flat.

Mainstream economists are also puzzled about the decline in labor participation. The percentage of the labor force that is employed or seeking work has plummeted despite 16 years of economic expansion:

Conventional economists look to labor market supply and demand for answers--and have come up empty. They can't explain why labor supply--people of working age that are actively in the labor force--keeps declining in a growing economy.

They are equally flummoxed by stagnant demand for goods and services: in an expanding economy, rising demand should spur higher demand for workers that should eventually push wages higher.

These higher wages should attract non-participants to rejoin the labor force and fuel higher demand for goods and services.

Instead, people are dropping out of the labor force, wages are stagnant for all but the top layer and demand is weak as well. This creates multiple serious long-term problems for the U.S. economy: if fewer people are working, wages will continue to decline as a percentage of the economy, which is precisely what has been happening for decades (see chart below).

If earnings and household incomes for the bottom 95% stagnate, these households cannot afford to borrow and spend more money--and that's why demand is tepid except when the purchases are financed at 0%.

If the top 5% garner most of the productivity gains, their spending must support consumption. That's a much shakier foundation for demand than 80% of the households participating in wage gains.

The reason why mainstream economists don't understand these developments is they don't:

1. Consider the systemic impact of energy and EROEI (energy returned on energy invested).

2. Consider the systemic impact of fast-rising private and public debt.

3. Consider the systemic impact of rising inflation resulting from state-cartel capitalism; the only possible output of state-cartel capitalism is a higher cost structure for' the entire economy.

4. Consider that consumption is exhausted because everyone already has everything--the utility of more consumption is increasingly marginal.

5. Understand the perspective of employers and marginalized workers. Most economists are safely inside the well-paid protected castles of academia or government, and so they have no real experience of being an entrepreneur or employer. They have no real grasp of how difficult it is to start a business or operate a business at a profit.

Let's review these one at a time. As Gail Tverberg of Our Finite World has explained in great depth (Energy limits: Why we see rising wealth disparity and low prices and Overly Simple Energy-Economy Models Give Misleading Answers), as EROEI declines and debt rises, there's less economic output available to pay workers.

In other words, the only possible output of declining EROEI and rising debt is stagnant or declining wages.

As for fast-rising debt: debt is nothing but future spending brought forward. Future earnings must be devoted to paying interest and paying down the debt. That leaves less money available for spending in the future. How difficult is that to grasp? Apparently it is impossible to grasp, judging by the Keynesian Cargo Cult of Paul Krugman and his fellow Cargo Cultists, who are busy staring at radio dials painted on rocks and declaring that the answer to everything is more debt.

The key feature of monopoly and state-cartel capitalism is ever-rising costs for everything controlled by monopolies, cartels or the state. Since these are the dominant structures in our economy, the cost basis of the entire economy rises even though output doesn't rise. In other words, we pay more for the same goods and services.

Mainstream economists cannot admit that demand is exhausted because demand is the foundation of all "growth." I have often explained why demand is systemically stagnating, along with "growth": Here's Why the Status Quo Is Doomed (September 2015)

The world is shifting from unlimited growth to limits and Degrowth:

Degrowth, Anti-Consumerism and Peak Consumption (May 9, 2013)

When Conventional Success Is No Longer Possible, Degrowth and the Black Market Beckon (February 7, 2014)

And the Next Big Thing Is ... Degrowth? (April 7, 2014)

Conventional economists may have an abstract understanding of business costs and regulatory burdens, but they have no life experience in actually earning a profit in a high-cost, state-cartel-dominated, globalized marketplace.

Being well-educated and well-paid, they have minimal contact with real-world marginalized workers. I personally know numerous young men and women in their 20s who live at home and are effectively out of the labor force. They could work but choose not to, or they can only find part-time work that can't support an independent household or they scrape by on earnings in the gig economy or the black market.

Whether economists care to measure this or not, the reality is many people choose not to work rather than take a minimum wage job that requires a long commute and hard labor. They consider it "not worth my time," demeaning, too difficult, etc. It's much easier to live at home and let Mom and Dad pay the bills, and make pocket money in the black market or from occasional gigs.

Others are willing to work in minimum-wage jobs but they don't live near job-rich areas or they lack the cultural and social values and skills required by employers: for example, the ability to show up on time, get along with other workers, etc.

There are few "easy jobs" in the private-sector economy. To eke out a profit, employers demand a lot of workers, from fast-food employees all the way up the chain to corporate managers. The reality is that modern work is challenging, requires multiple skills and a solid set of values. Many people lack the ability and/or will to function effectively in these conditions.

From the employer's point of view, regulatory burdens and the soaring cost of labor overhead make it increasingly difficult to stay afloat. From the small cafe owner trimming workers' hours to global corporations laying off thousands of employees, the reality is that earning a profit is increasingly difficult for all but a handful of big-tech quasi-monopolies such as Google, Microsoft and Facebook.

To hire someone at $15/hour, an employee must get at least $45/hour of value from each hour of employee labor. The employer has labor overhead costs--Social Security/Medicare, healthcare, unemployment, 401K/pension payments, liability insurance, etc.--plus the direct overhead of rent, production and the back office (accounting, regulatory compliance, etc.).

Then there's all the taxes and junk fees that must be paid "because you business owners are rich and can afford it."

This chart shows the reality: new business formation is collapsing because it's an increasingly risky wager to start and operate a new business. The mainstream lauds the entrepreneur and the media glorifies a handful of tech billionaires, but for the bottom 99% of enterprises, it's a struggle that is increasingly not worth the risk, hours, stress, anxiety and hassle. At some point, for health and financial reasons, the only way to survive is shutter the business and lay off the employees.

No wonder wages as a percentage of the economy have been declining for decades. Global corporations have the advantages of financialization and globalization, but everyone else is staggering under the weight of higher taxes, higher costs and heavier regulatory burdens.

The only way to reverse declines in labor participation and stagnation in wages is to make it easier to start enterprises and hire people, and dramatically lower the cost basis of the entire economy. There is scant evidence that policymakers have any real interest in either of these goals or any knowledge of how to make them happen, despite the abundance of lip-service paid to "business-friendly" strategies.

Alternatively, we need a new system for providing paid work (and the dignity that comes with work) like the one I describe in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All. (You can read the first part here.)

*  *  *

My new book is #5 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition) For more, please visit the book's website.

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Boris Alatovkrap's picture

Once economy of country is no longer support by creation of object/service of real value, that is what is naturally happen - wage is stagnate. Surprise, surprise, surprise!

bamawatson's picture

but but but facebook twitter instagram pokeman AI netflix hyperloop solar city solyndra global crossing

dilligaff's picture

You just had to bring up Global Crossing. God I lost a lot of money on that POS...

max2205's picture

Simple blame EBT and disability and student loans that you can buy anything with.... Otherwise this would be the worst and longest depression ever.

 

 

NoDebt's picture

Small number of rich, large number of poor and just enough middle class to service the rich.  As it has been in most societies throughout most of human history.  The 20th century was the anomaly, not the norm.  What's going on is one giant reversion to the mean.

Questions?

 

GreatCaesar'sGhost's picture

The problem is much simpler than that, supply and demand, economics 101. The US has had a steady flow of illegals taking jobs at slave wages, keeping the wages of citizens low. There was a time when a deli worker could support a family of four, afford a house and send his kids to college, and it wasn't that long ago. The rich are going to have a whole of poor to support them when Hilary swings the door open even wider. Of course, eventually the poor always revolt, and then it won't be too safe to be wealthy.

crossroaddemon's picture

Yeah, but the scenario you are describing is an ANOMALY... it's unique to the 20th century first world and will probably never be repeated. Look, I've got a bachelor's in anthropology and my study of indigenous cultures whilein school led me to the following conclusion: the only egalitarian societies ever have been politically autonomous groups of 150 people or less with no material wealth as we define it. My professors couldn't really argue with that, but where we butted heads was my contention that it's not going to get any better than this. Our options are tyranny or local autonomy; there is no in between. Big systems are evil and tyrannical and will never be anything else.

duo's picture

Financialization has become a parasite that went from 10% of our economy in the 60s to 40% of it now, absorbing all of the productivity gains of the productive economy and more.  Add de-industrialization, immigration, and war, and you have the elite's wet dream.

CJgipper's picture

The problem is that these charts are wages, and everyone knows the real rich make all of their money from capital gains.  This is just comparing doctors to bartenders.  If you want to see the REAL gap, go to capital gains where financialization has distorted everything.  The top wage slaves are increasing spending because real estate has been pumped back up along with cars.

Flagit's picture

Speaking of surprises,

http://www.zerohedge.com/news/2016-08-13/18-years-later-another-warning-fed-clintons

 

Anyone else have their comments removed from this post?

Questions were raised about the whereabouts of Eric DeCarbonnel.

Now, all gone.

 

GeezerGeek's picture

Ask about someone not heard from since 2012 and your comments/questions apparently follow him into the great gray mist.

I've not heard of it at ZH, but apparently some social media sites hide comments by certain posters from everyone but the poster. You might think your comment is there, you may even see it there, but no one else ever sees it.

All part of "total domination".

rejected's picture

Yep,,, Infowars was bad about that. The way to check is to clear all cookies, then go to the site as a visiter.

rejected's picture

Well, for sure there was more than one page.

aurum4040's picture

Wages of the middle decline and or stagnate and wages of upper management and executives continue to increase. The top are shooting themselves in the foot.

crossroaddemon's picture

No they're not. The end of growth is upon us and they no it. So they're grabbing what's left for themselves, and fuck the rest of us.

crossroaddemon's picture

No they're not. The end of growth is upon us and they know it. So they're grabbing what's left for themselves, and fuck the rest of us.

Winston Churchill's picture

A better and more comprehensive reason is given in the contributors
article by SRSROCCO above.
I recommend everybody reads it.
All the current insanity in the 'markets' makes sense suddenly.

Houses Depreciate's picture

Simple solution is stop interfering with markets and let these fixed, rigged and inflated prices crater to dramatically lower and more affordable levels creating jobs and accelerating the economy like nothing else can.

brushhog's picture

Or, since they will never stop interfering with markets and inflating prices...they should interfere with ALL markets to inflate prices equally. That is accomplished via the tartiff.

Infield_Fly's picture

You put a cultural marxist in the white house and SURPRISE!!!!!! you get hopey changey.

 

 

Pitiful's picture

You missed the part where this has been going on for 40 years. (See charts above)

Dems and Repubs are two heads that belong to the same beast. 

51.9Percenter's picture

I don't see what Obama could do knowing the Senate controls the finances and the Republicans are basically an insurgency. Obama never really had a shot. He came in 2008 thinking and hoping he did only to realise it was a grind. 

In.Sip.ient's picture

the only way to reverse declines in labor participation and stagnation in wages and demand is to make it easier to start enterprises and hire people.

 R U NUTZ!

 

The entire purpose of ZIRP/NIRP is to KILL

capital accumulation for the purpose of preventing

anyone from starting a business and competing...

with ( least of all the preferred parts of ) the PTBs!!!

 

GET A CLUE!

 

WHat the F(!) do you think TBTF is about???

 


dusty88's picture

Yep, just heard Bill Clinton say what Bernie Sanders said, that we have to make more loans available to small business.  They are clueless?  I can borrow to the moon, go bankrupt, and probably borrow again.  Their monetary policy and tax-advantage retirement stock investments drive the money into shareholder corporations instead of small businesses. 

 

 

Batman11's picture

The US and the West never did get the hang of this globalisation thing.

China and India have added a billion workers a piece to the global workforce, there is plenty of spare capacity in the labour force acting as a permanent drag on wages.

Foolishly we have let living costs soar in the West, with house price booms nearly everywhere apart from Germany.

The high mortgage payments and rent eat into suppressed wages reducing the standard of living and purchasing power of the vast majority of workers.

For workers in the West to compete in a global economy, we need a similar basic cost of living to those in the East.

The minimum wage to cover the basic cost of living must be the same in the East and West.

The US has probably been the most successful in making its labour force internationally uncompetitive with soaring costs of housing, healthcare and student loan repayments.

These all have to be covered by wages and US businesses are now squealing about the high minimum wage.

When you've got the cost of living down, productivity is the next item on the agenda.

 

crossroaddemon's picture

If cost of living is eating you alive it is because you are stupid. Only an idiot would live in a place where a mortgage is going to eat a substantial percentage of your income basically forever. I moved to small-town Minnesota and live COMFORTABLY in a house I own for around $20k/year. I could make more if i wanted to, but who the fuck works more than they have to? Your kids need your presence more than they need extra shit.

Pitiful's picture

No more Welfare, no more child tax credits. 

Two things that could make a huge impact on our national budget. 

brushhog's picture

Simple answer.....TARIFFS. Bingo, problem solved.

dusty88's picture

No, some of us don't really have overseas competition.  But we are still bogged down with regulation. 

brushhog's picture

Then you raise prices to cover the costs of the regulations.

dusty88's picture

You're forgetting the wage problem.  Customers have less to spend.  Years of regulation (and many other reasons of course) have created inefficiencies.  We could raise prices at will before 08.  Not anymore. 

 

Also, most regs are a relative advantage for a large corporation compared to smaller competitors. 

brushhog's picture

Wages are low because there are no tariffs to boost domestic demand for labor. Follow the logic; Tariff= incentive for domestic production=demand for labor=higher wages= increased spending= increased production, etc,etc Its an upward spiral.

rejected's picture

Yes but the propaganda is that protectionism = Baad. Worse the majority seem to buy into that,,, especially the gov-school-sys indoctrinated millennials.

Tariffs is what equalized the living standards around the world. The new Global Free Trade is really Global Slavery. Free trade would allow companies of all countries to compete. What has happened is the major corporations have simply moved their factories to the lowest wage states. Thus the workers where a higher cost of living prevails have to compete with the bare bottom groups.

This results in stagnating / lowering wages and is what we are seeing. The PTB know this, just like they know immigrants/migrants/whatever will also lower wages and destroy cultures. Assholes like Merkel, Obama and the rest know exactly what they're doing. By the time enough of the electorate figure it out, it'll be too late.

Pabloallen's picture

There are few "easy jobs" in the private-sector economy. To eke out a profit, employers demand a lot of workers, from fast-food employees all the way up the chain to corporate managers. The reality is that modern work is challenging, requires multiple skills and a solid set of values.   Many people lack the ability and/or will to function effectively in these conditions.

 

 

Not for 10 bucks an hour .............  

White Mountains's picture

Ten bucks is a training wage.  Not meant to be a career - presumably as your skills increase you can go on to earn more as your value increases.

Let the market decide, or the market is going to decide to go full robots

crossroaddemon's picture

The market's going to go full robots anyway. Have you seen the cost/benefit analysis for the fast food kiosks? It'd save the companies money even if wages were as low as $4 an hour... a wage that's not even worth getting the fuck out of bed for. The robots are coming regardless of what the minimum wage does. And it's gonna hit everybody, even skilled workers. My sister and her husband for instance... my bro-in-law is a truck driver (not exactly skilled, but you still need a class A license and some certifications cus he hauls hazmat) and don't even talk to him about robot trucks. The goddamn things are already on the road and although there are problems and for the moment they still require a human occupant don't think for a second that they won't get the bugs worked out. Guys like him have maybe ten years. My sister is a lab tech at a hospital. She showed me an article about new tech that will get more data from a drop of blood drawn from a pinprick than they get with a whole vial right now, and transmits a detailed breakdown of said data to a fucking iphone app. She figures she'll be lucky to get five more years, and she works in a small-city hospital that'll be amongst the last adopters. The robot armies are coming, and pretty much everyone is going to get replaced.

White Mountains's picture

You left out how DANGEROUS employees are to a business....trying to hit the lottery via lawsuits against the employer, etc.  It is much easier to make up a fake grievence (alleged sexual harassment works wonders, which is why I would NEVER risk hiring a woman) with the goal to settle out of court for a big windfall - alot easier money than having to go to work every morning.

This is where robots come in.  They don't sue the employer.

I am looking forward to when the Cherry 2000's come onto the market.  Might get me a couple of them!

EmeraldWI's picture

Oil embargo.

Recession.

Reagan.

End.

Baron von Bud's picture

Many in my boomer generation benefited from an era of ample jobs, fairly good pay, pensions, and social security. But we're paying for it on the back end by supporting our adult kids and caring for elderly parents. Vacations? Vegas? Golf weekend? I saved my whole life and now can't get away for two hours because my 90 year old mother can't be left alone. It's like being under house arrest.

 

 

I Write Code's picture

You can get caregivers for a few hours or a few days as needed.  Just been through it myself.

slowimplosion's picture

Uh, no.  Not even close.

gregga777's picture

That analysts and "ex-spurts" are mystified about why wages are stagnant is further proof of my contention that they are all subnormal IQ morons. Or, government propagandists. Well, most likely both.

Since 2000 (Q2 2000 — Q4 2015) approximately 41,000,000 (+19%) more Americans have been added to the pool of working age Americans. Yet, the total number of hours worked has only increased by about 2%. This is indicative of a depression, a more than temporary divergence from the economic growth trend, a +16 year divergence in growth. The Great Recession was not a recession after all, it was another episode in an ongoing depression.

There are almost 100,000,000 working age Americans who are not working. The government has fraudulently manipulated the unemployment rate by dishonestly claiming that tens of millions of these Americans have voluntarily left the work force. For that to be true there would have to be at least an additional 20,000,000 unfilled job openings in the United States. If so, where are those tens of millions of unfilled job openings? If that were true businesses would be in an uproar over the lack of able-bodies workers.

Does that not explain why wages are stagnant and also why wealth and income inequality continues to worsen? Per John Williams' Shadow Government Statistics ( http://www.shadowstats.com/alternate_data/unemployment-charts ) July 2016 true unemployment is 23.0%!!! The organs of state (mainstream media oligopoly) propaganda and their master, the Feral government, are lying about the true condition of America. The economy is really shrinking, not growing. These tens of millions of working age Americans and the long term stagnation in hours worked proves that.

I Write Code's picture

It's the Obamanation, Jake.

gregga777's picture

ZIRP and NIRP are glaringly obvious examples of the interest rate fallacy (see the writings of Jeffrey P. Snider, Alhambra Partners, @ http://www.alhambrapartners.com ) in action. Low, zero and negative interest rates are very short term stimulants and only in a growing economy. Long term low, zero and negative interest rates are all indicators of monetary contraction.

But, you say, how can there be monetary contraction when the Bank of Japan (BoJ) and European Central Central Bank (ECB) have monthly qualitative easing (QE) or qualitative quantitative easing (QQE) programs totaling about $180 billion monthly? And now the Bank of England (BoE) has joined the QE party?

First, because QE/QQE are not stimulative. They are sterilized because adding bank reserves to banks unwilling to lend because the banks lack borrowing opportunities.

Second, the monetary destruction in the "Eurodollar" or "dollar" wholesale, ledger-based markets financing international trade since the Great Financial Crisis (GFC) has been far, far greater than all of the central bank's cumulative so-called stimulus.

Mr. Snider should take all of his research and write a book explaining why we are currently experiencing a world-wide economic depression. World trade and GDP growth have both been well below the prior trend since the GFC. I highly recommend reading his voluminous work to better understand not only that we are in a depression, but, also why we are in a depression. Because the Feral Reserve System, and all of their sycophantic supporters, as well as all other central banks, are clueless.

I Write Code's picture

Two things.

First, the glory of that top 5% is nearly all in the top 1%, and the glory of the top 1% is nearly all in the top 0.01%.  This has been posted on ZH multiple times and is depressing enough to repeat at every opportunity.

Second, it ain't as easy as "start more small businesses".  Globalization and automation reduce jobs worldwide and allow efficient businesses to consume others. Most small businesses are inefficient, filling local gaps.  The Internet and such, the "frictionless economy", leaves less room for small business.

Solutions are going to be much more radical.

It is good news, of a sort, that we have an endless supply of food and widgets, with barely half the population working at all.

White Mountains's picture

Yup.  Fact is it is tough for a small business to compete online - which is why you see small towns closing up shop and Amazon becoming huge.