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Real Wages Are on a Steady Decline

DAVID M. GORDON <i> is professor of economics at the New School for Social Research in New York</i>

As the economy shows more and more signs of slowing down, the economic celebrants never tire of boasting about the longest cyclical expansion in the postwar period.

But the U.S. economy has quietly been setting another historical precedent with shattering consequences for the vast majority of Americans: From one business-cycle peak to the next, workers’ real earnings have been declining steadily and dramatically since the early 1970s. This is the first time in the 20th Century that workers’ real earnings have actually declined through the course of a full business cycle and the first time since the Civil War that they have shrunk over such a long period.

It’s easiest to begin this sorry story by looking at real average hourly earnings for all production and non-supervisory employees--accounting for more than four-fifths of all wage-and-salary employees in the economy. In 1988, this group earned, on average, $7.32 an hour. In 1979, controlling for inflation, they were earning $7.64 (in 1988 prices). In 1973, before the erosion of workers’ earnings began, the same group was earning $7.93 (in 1988 prices).

Higher Rate in ‘40s

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Over 15 years, in short, the real hourly earnings of four-fifths of all U.S. workers declined by more than 8%--at an average annual rate of half a percent a year. After deducting taxes, whose bite increased for workers during this period because of the continuing increase in payroll tax rates, the total decline since 1973 was closer to 9%--from $6.58 an hour (in 1988 prices) to $6.01.

Such princely paychecks! An average production/non-supervisory worker doing 35 hours a week at this rate for the entire year in 1988 would have cleared slightly less than $11,000. This fell significantly below the official poverty threshold for a family of four.

By what historical benchmarks might we compare this atrophy of workers’ earnings? The contrast in the period since World War II is stark.

During the long boom period between 1948 and 1966, real hourly earnings for production/non-supervisory workers increased at an average annual rate of 3% a year. As inflation began to escalate after the mid-1960s, real wage growth slowed. In the 1966-73 business cycle, average annual growth in real hourly earnings dropped to 1.7% a year--a decline in growth rates, to be sure, but growth nonetheless. Since 1973, across the two intervening business cycles, there has been actual decline.

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Slowed in the ‘20s

But what about the decades before World War II? The U.S. economy has been enduring a shaky period since the early 1970s--buffeted by international competition, inflation, spiraling debt. Shouldn’t we simply chalk up this decay in workers’ earnings as the inevitable price of stagnation, of slower growth, of what many of us call economic crisis?

Quite to the contrary. There is no precedent for this sustained erosion of workers’ earnings. It’s never happened since the U.S. economy achieved mature capitalist power around the time of the Civil War.

For such longer-term comparisons, the data requires that we look not at production/non-supervisory hourly earnings but at average weekly earnings for all employees. The record by this measure has been just as stark during the past 15 years--with a steady decline of earnings averaging closer to 1% a year.

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With this data, the comparisons are striking. There have been two sustained periods of stagnation since the Civil War: the devastating crisis from 1873 through the early 1890s--a period that many contemporary observers called the “Great Depression"--and the more recent Depression of the 1930s.

During both of those periods of economic collapse, workers’ real earnings continued to grow despite the economic doldrums. From 1873 to 1892, workers’ real earnings increased by an average of 1.5% a year. During the crash of the 1930s, measuring from the pre-crash peak of 1929 to the late-'30s cycle peak of 1937, real earnings grew at 0.54% a year. (Actual earnings did not grow, but in both of these periods prices dropped considerably more than wage income.)

In the 20th Century, the slowest growth of workers’ real stipends during a single business cycle, setting aside the two world wars, was during one of the business cycles of the 1920s; in the 1923-26 cycle, earnings growth was only 0.53% a year. The next slowest, aside from the Depression, was the 1902-06 cycle, at 0.6% a year. Every other business cycle, through buoyant times and tepid times, averaged better than 1% growth a year.

During the first 70 years of the 20th Century, in short, workers could look forward to higher real earnings from one business cycle to the next. Over the past two business cycles, these historical expectations have been shattered.

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Why? There are many reasons, some fairly obvious.

- Unlike the periods of slower growth in the 1870s and ‘80s and the Depression of the 1930s, prices have not fallen during this recent episode of stagnation but have actually accelerated--giving rise to the notion of “stagflation.” Workers’ paychecks have not been able to keep pace.

- During the entire period from the Civil War through World War II, the United States was steadily expanding its relative power in the global economy. More recently, the U.S. economy has been declining in relative power, exposing firms and their employees to increasingly intense international competition.

- Behind the headlines, U.S. corporations have been waging increasingly aggressive warfare against unions and workers, demanding concessions on wages and benefits, moving to bust unions . . . the list goes on. And public policy has gradually followed suit. Especially since the beginning of the Reagan Administration in 1981, the federal government has turned increasingly toward a pro-business, anti-worker stance--ranging from its destruction of the air traffic controllers’ union to the freezing of the minimum wage to the loosening of standards for inspection of workplace health-and-safety hazards.

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Quit in Protest

It is worth remembering how stunning these changes in policy seemed to those who had witnessed the relatively more “cooperative” spirit of labor-management relations during the first 25 years of the postwar period. In 1978, Douglas Fraser, then president of the United Auto Workers, resigned in protest from a private and informal discussion group of leading corporate executives and labor leaders called the Labor-Management Group. He explained his resignation in a widely circulated letter:

“The leaders of industry, commerce and finance in the United States have broken and discarded the fragile, unwritten compact previously existing during a past period of growth and progress. . . . I am convinced there has been a shift on the part of the business community toward confrontation, rather than cooperation. . . . I believe leaders of the business community, with few exceptions, have chosen to wage a one-sided class war in this country--a war against working people, the unemployed, the poor, the minorities, the very young and the very old, and even many in the middle class of our society.”

That was in 1978. Nothing that’s happened in the past 11 years leads me to temper Fraser’s harsh judgment.

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