EconoMatters, Rethinking America

Can the United States Close the International Wage Gap?

A generational effort is required to restore growth in U.S. wages.

Annette Bernhardt - Wikimedia Commons

Takeaways


  • Democrats will fail to end wage stagnation in the US until they undertake a generation-long education effort.
  • Is tackling wage stagnation in the US an impossible mission?
  • An effective U.S. wage agenda must center on linking wages to productivity.
  • What unique circumstance will it take to force the US to commit to wage reform?
  • Could wage reform become a reality by using states and cities as “democracy laboratories?”

Despite the sincerity of their sentiments, Democrats will fall flat in efforts to end wage stagnation in the United States until they undertake a generation-long effort at educating the workforce.

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.

Is that a mission impossible? Perhaps so, but the country has tackled tough challenges before. Success demands focus, energy and commitment. Perhaps that seems a difficult pitch in a culture so focused on biennial elections and quarterly profits.

Closing the gap holds partisan promise, however. As a campaign issue, the international wage gap would dramatize a Democratic economic agenda that systemically links wages and productivity. This would pose a compelling contrast to tired Republican policies that offer no bold, forward vision.

Ideally, that contrast would be sufficiently sharp to lure even the traditionally apathetic non-voters to go vote in their self-interest.

What international wage gap?

U.S. Bureau of Labor Statistics data document that manufacturing wages in 10 other rich democracies now exceed U.S. wages by as much as $10 per hour in purchasing power terms.

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 joined by a fair number of Democrats, even if the 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.

An effective U.S. wage agenda must center on linking wages to productivity, as I have argued earlier in The Globalist. That explains why wages in Australia and northern Europe have leapfrogged U.S. wages.

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, involves bringing employees onto 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 Germany companies, relative to their quarterly-profit-oriented U.S. peers.

Co-determination promotes growth through cooperation, instead of having labor and management compete divisively for short-term wins that add drag in the long-term.

Adding employees to corporate boards improves the performance of firms. And it is the key to boosting anemic U.S. R&D and woeful corporate under-investment to match nations such as Germany.

A number of U.S. corporate officials would therefore welcome higher wages if they came in a form that also benefits corporate long-term growth.

Empowering employees with worksite reforms is a useful starting point, as U.S. Democrats and U.K. Labour Party members alike have recently advocated on both sides of the Atlantic.

However, ensuring that real U.S. wages rise steadily year after year will require more, including legally linking wages and productivity growth. If a company does very well for itself, some percentage of those profits must be translated into higher wages for employees, rather than merely being 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 featuring a war on wages has become institutionalized. American history has shown that once a damaging economic arrangement has been established, it is extraordinarily difficult to uproot.

Examples range dramatically from the U.S. Constitution’s refusal to end the slave economy built during colonial times (or the continued, institutionalized economic entrapment and suppression of Black Americans for decades after the Civil War) to the creation of an employer-centered health care system.

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 circumstances.

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.

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. Americans as a population are exceptionally reserved and cautious about trying new approaches to anything. Therefore, 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 must 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, whether on civil rights laws or Progressive Era programs.

Already, this process has begun. 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.

And 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 waste.

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About George R. Tyler

George R. Tyler is an economist and the author of "What Went Wrong." Follow him @georgertyler

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