My Take on the Wage Debate

There has been much said lately about the relationship between the United State's aggregate economic gains and the level of worker wages. The majority of the talk has been laced with political bias as politicians and talking head types try to pick up votes in November. The argument heard most is that the average middle class worker is getting the short end of the stick by seeing his productivity increase to historical levels, his real wage (wage minus inflation) fall, and corporate profits skyrocket. It is said this is further evidence that the Republican Party is one of the upper class and is out to exploit the poor to benefit the rich.

The productivity gains of the last five years have been unprecedented in documented history. The American worker has defied the law of diminishing returns and increased his productivity to record levels and drove corporate profits to ever-higher levels. These excess profits show up as either wage increases, business reinvestment, or a combination of the two. This is where the liberal pundits have it wrong. Businesses have taken advantage of these strong profits, an easy money policy by the Fed, and extraordinary amounts of capital sloshing around the world to invest in expanding their business. This investment has fueled the large amounts of jobs created this decade and driven the unemployment rate down to 4.7%, which many economists believe is close to the natural rate of unemployment. So, instead of business owners raising the wages of current employees, they have opted to create more jobs. Eventually, as more jobs are created the availability of labor shrinks, forcing employers to pay more to workers. Seems like a pretty good deal for the lower and middle classes when more lower level jobs are being created, and eventually this job creation pushes up wages.

Now, I am not at all conceding or using the above to say I agree that workers are not making more money. When looking at wages, which is the figure that best supports the left's story, then real wages have in fact declined slightly. You must look at total compensation to see the worker is actually much better off now than five years ago. Benefits have risen by 12%, taking the burden of ever the increasing cost of health care off the worker. With benefits added in, inflation-adjusted overall compensation is up a substantial 10.6% since 2000.

Recent data has shown wages, which are laggards to profitability, are beginning to increase strongly. In the second quarter, annual hourly business wages increased by 7.7%, the most since 2000. With the strength in the American economy poised to keep delivering strong profits along with increased world wide free trade, the American worker should expect his compensation to continue to increase in line with the classical American dream.