Rebuilding America’s high-wage economy

August 1, 2013

Good for President Barack Obama for emphasizing the need to restore America’s middle class. However, the actual proposals in his new summer offensive would not go very far toward that worthy goal.

America is moving, at an accelerating pace, toward an economy with tens of millions of poorly paid service jobs at one end, and a relatively small number of astronomically compensated financial jobs at the other. In between the fast food workers, who demonstrated this week for a living wage, and the hedge fund billionaires is a new creative class heavily based on the Internet. But the web entrepreneurs are too narrow a segment on which to rebuild a broad middle class.

For a quarter-century after World War Two, America was a far more equal society — with jobs that paid a “family wage” on a single paycheck. One question dividing economists now is whether the more equal, high-wage economy of the postwar era is irrevocably gone with the steel mills of Pittsburgh. Or whether a service economy can become an egalitarian one with a different set of policies.

I am among those who think America can still be a high-wage economy — but first we need to restore a lot of regulation.

The fact is, we are a lot richer — on average — than the United States of the 1950s. The problem is how our bounty is distributed.

You may recall the fellow who had one foot in a bucket of ice and the other in a bucket of boiling water — and on average was very comfortable. On average, Warren Buffett and I are both very rich.

What would it take for America to spread that wealth around — as candidate Obama memorably suggested to “Joe the Plumber” in 2008? And, given wall-to-wall Republican obstruction of even the tamest Obama proposals, what might the president do that does not require legislation?

The Republicans, after years of trying to shut the agency down, have just confirmed Obama’s appointments to the National Labor Relations Board. The administration could get a lot more proactive about defending workers’ rights to organize and join unions.

That means not just more aggressive prosecution of unfair labor practices by a newly invigorated board. During World War Two, for example, President Franklin D. Roosevelt issued executive orders barring labor violators from receiving government contracts. In the early 1960s, before civil rights laws passed, Presidents John F. Kennedy and Lyndon B. Johnson used the same executive power over contracting to insist that large employers cease practicing racial discrimination in hiring and promotion.

The Labor Department could also crack down on the bogus classification of regular employees as “contractors” — which saves companies payroll taxes, denies workers benefits and makes it impossible for them to unionize.

Obama could also use his authority to change the trade agenda. For three decades, industry has set the agenda for trade talks, making it easier for companies to outsource, hide profits offshore and avoid health, safety, labor and environmental standards. The trading system could instead put a floor under social standards.

The administration took a constructive baby step in this direction when it denied Bangladesh benefits under the Generalized System of Preferences, as a way of pressuring the Bangladeshi government to respect the worker rights guaranteed (in principle, anyway) under the accord negotiated after the deadly April garment factory fire.

There is nothing inherent about the new economy that requires the top 1 percent to make off with so much of our national wealth. The president could appoint tougher financial regulators — beginning with the vacancies at the Federal Reserve.

Other measures to rebuild the middle class — progressive taxation, public investment, better education from pre-kindergarten through college — will take legislation. But Obama could be even more forceful about making that legislation popular politics.

In his Knox College speech, the president, in an aside, called for a higher minimum wage. It would be helpful if he stood with the fast food workers who pointed out that in America today you can’t live on a minimum wage of $7.25 an hour. Who can dispute that?

He could call on industry to pay a living wage, and support local living wage campaigns. He could also call for a national policy of upgrading human service work — so that anyone who cares for the young, the old or the sick is paid a professional wage.

What killed the more equal prosperity of the postwar era? It wasn’t just a shift from factories to services. Trade, technology, the unleashing of Wall Street, the gutting of progressive taxation, the failure to extend the welfare state to working families, the weakening of unions — all were implicated.

But one core point connects the others: The economy of that era was more heavily regulated.

Take labor markets. Most jobs were based on a standard workweek. Wage and hour laws were enforced. So was the right to join a union. The real minimum wage was a lot higher, both in purchasing-power terms and in relation to the average wage. This was the heyday of the blue-collar middle class — when a single paycheck supported a decent standard of living for a whole family.

One-third of the workforce belonged to unions then. Even non-union employers often matched union pay scales and benefits — as a way of keeping unions out.

The postwar era was also a time when the affluent paid marginal tax rates as high as 91 percent, but most regular people paid modest taxes. Payroll taxes, for example, topped out at 1.5 percent for workers and 1.5 percent for employers. Corporate income taxes brought in a far higher share of federal revenue than they now do.

As a consequence of all this, the income distribution was far more compressed than it is today. That shared prosperity did not prevent the economy from growing at a real rate of nearly 4 percent per year during the quarter-century after World War Two. On the contrary, the broadly distributed purchasing power was good for economic growth.

The tight regulation of finance also prevented the top 1 percent from running off with a disproportionate share of the economy’s gains. There were no hedge funds. Bankers made a very nice living, thank you, but few became super rich.

We had a lot of trade, but we had few competitors who produced the core products that America made, at a fraction of the wages. And we were not ashamed to defend our social contract with tariffs.

It took several decades of struggle in the middle of the last century, including union organizing and supportive public policies, for factory work to pay a living wage. Now, with factory jobs being replaced by robots or by Third World workers, the economy is more productive and wealthy (on average) than ever, while the service economy pays mostly wretched wages.

With the exception of a small elite of skilled trades, there was nothing inherently high-wage about factory jobs. The work was semi-skilled, repetitive and mostly soul-killing. The jobs were “good” only because they paid decently — thanks to the efforts of unions and government policy.

Now we need to do it all over again with the service economy.


PHOTO: President Barack Obama speaks about the economy during a visit to Knox College in Galesburg, Illinois, July 24, 2013. REUTERS/Kevin Lamarque

PHOTO (Insert A): President Lyndon B. Johnson and Martin Luther King Jr. in the White House. CREDIT: LBJ Presidential Library.

PHOTO (Insert B): Demonstration during the Chrysler strike in Detroit, Michigan in 1937. Credit: Walter P. Reuther Library


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In the post world war 2 economy, The US had much less competition as the European industrial base was destroyed, The communists had taken over Russia and China and so we became the de facto largest cheapest producers of many products which we sold all over the world. Europe has now recovered and the communists in China have allowed some capitalism to happen there – with the result that we are no longer the supplier of choice for many of the worlds goods. Short a major war or plague that does not affect us, the post war conditions are not going to return. The minimum wage artificially set by government have set a floor on the cost of labor, and that floor is not competitive with other countries, so all the jobs that could leave have left in search of maximum efficiency. Increasing the minimum wage has led to fewer jobs and more taxes to be paid by entry level workers. When I was a high school student my classmates often talked about being rich – making 30 or 40,000.00 per year- and that was rich at the time. Now this is poverty level, but those people still pay income taxes and others taxes, making the tax burden higher in proportion to their position in life than it was in the 1960’s. A free economy will take care of “spreading the wealth around” far better than any centrally planned endeavor as has been demonstrated in the abysmal failure of socialism and communism all over the world. Since you propose a higher floor on wages so that everyone would make a living wage, why stop there? Dream bigger man, and set the floor at $1000.00 per hour, and call it the superlative wage! I would really like to see an article by an economist who would do the calculations of the economic impact of this superlative wage, which is an extension of the argument for a minimum wage. It is a very nice dream but I do not think it will work in reality, nor do I think that the minimum wage has worked as it was intended all those many years ago. The minimum wage has resulted in the flight of manufacturing jobs and has not boosted our economy or the well being of the poorest members of our society.

Posted by zotdoc | Report as abusive

Robert… are glossing over many things…hey, I wish I could hit the lottery tonight too….

Posted by rikfre | Report as abusive

A century ago, when progressivism became a major national force and succeeded in the creation of a national income tax, it was a radial idea to tax those who would today be making $11M per year at 7% of their income. Today, few people make proposals that would tax those making over $200K at anything less than four times that rate.

The idea that we’ve become some kind of feudal society where swarms of landless peasantry are slaves to a few aristocratic lords who intentionally and willfully keep them down is fantasy compared to the far more demonstrable trend that America has become a high-tax redistributionist society where half the population has the power to vote themselves a raise out of the paychecks of the other half, and where nearly 40% of the national tax burden is carried by those who make less than 20% of the national income.

Posted by mburn16 | Report as abusive

Ehat produced vibrant growing companies and good paying jobs? competition. has anyone else noticed that in several huge, vital sectors of the economy we no longer have competition? the big five banks just rake in the cash with guaranteed profits from the feds, “too big to fail” no matter what they do. the entire health care industry is purposely set up, legally exempted from the laws regarding competition, to collude and set rates ever upward…why isn’t there a contest between x-ray labs to get our business with the most affordable service?

the giant media companies, as exquisitely shown by the CBS/Time Warner fight this week, is almost totally insulated from competition; the studiops and networks simply tell the cable/sat providers that they want more per household…the providers have no choice but to pass it all of these instances we have no options no choice but to pay or in some cases just discontinue the entore service…monopolies.

the companies have grown and swallowed their old compeitors, in the process becoming so flush financially and powerful that they could buy themselves shelter from future competitors or, the other fork of our system, regulation. the bank laws, media laws all relaxed to blur lines and let these firms create havens where they just sprawl and absorb our income with no threat…..restore the twin equilizers of competition and regualtion, let the engine of our economy roar again.

Posted by bgmike66 | Report as abusive

RK: “…one core point connects the others: The economy of that era was more heavily regulated.”

Really? Mr. Kuttner, do you want to wager on any of these bets:

1) there are today, far, far more pages of regulations than any year you wish to pick during or after the prosperous years, or now.

2) there are far more regulatory agencies and personnel,spread across all 57 states, with budgets to boot, than there ever has been.

3) It’s far more difficult today to start a shoe-string business, even down to the selling lemonade by the house curb.

It is entirely a revision of history to claim the prosperous years were due to regulations. If such is the case, please point to us, one single prosperous Communist country in the history of the world.

Posted by HAPPYLonghorn | Report as abusive

Best way to grow high paying jobs!

Double all current employees’ salaries.

A Liberal study by a Kansas student says it would work for McDonald’s fast food chain.

So why can’t it work for the rest of America?

Posted by vatodio | Report as abusive

Mr. Kuttner,

Try looking at data and basic economics instead of trotting out a bunch of worn out policy prescriptions and ideological “narratives”.

Specifically, look at a chart of labor force participation vs real wages over time side by side. Throughout the “golden era” you talk about, the LFPR hovered below 60%. It started to rise in the mid-1960s, and continued through the early 00s, reaching a peak of about 67%.

Now break down the LFPR for men and women. Now add a chart showing the foreign born percentage of the U.S. population, which has exploded since the late 60s, and has now reached levels not seen since the 1920s.

Supply and demand. Wages have fallen because there are more people competing for jobs. Specifically, women and immigrants. That’s reality, not ideology.

Now what’s your solution?

Posted by JoeS4 | Report as abusive

“There is nothing inherent about the new economy that requires the top 1 percent to make off with so much of our national wealth”.

Silly me- I thought a lot of those rich people earned their money by making and selling a product or service others wanted. I thought it was their money and didn’t realize their wealth was really ours and they were taking it from me.

Posted by lvmises | Report as abusive

I’ve always appreciated your work Dr. Kuttner. For those who believe in an unrestrained free-market, for those of you who believe that labor supporting laws and unions were not the reason that nearly all Americans could enjoy the strong economy of the 1950s, how do you explain this?

Ever since Reagan, income inequality has grown dramatically except for one brief period (You guys remember that time; you elevated Monica Lewinsky’s stained blue dress to news story of the millenium).

None of your nostrums appear to help guys like me. You claim that money saved by tax cuts on the richest would trickle down to guys like me. It didn’t. It really didn’t. It really flowed ever faster upwards. Rich got richer.

You claimed that an unregulated market would bring prosperity to guys like me. It didn’t. It let financial psychotics trick financially unsophisticated Americans nto giving them money they borrowed from banks to pay for overpriced homes. Their Ponzi scheme collapsed. Unsophisticated Americans were burned. The Ponzi scheme turned out to be the only support of the W economy. When it collapsed, it took the economy with it. Folks in debt for bag mortgages were no longer employed. More debt. More ruin.

President Obama did what he could to stop the ruin. You guys called him a socialist.

You can’t be a Republican and a patriotic American at the same time; you just can’t.

Posted by leisureguy | Report as abusive

quite silly — a dialectic in search of matching facts and finding only failure. Folks can produce higher wages by producing something of value. They can become more valuable as capital is employed to make them more productive. Lattes & big Macs are a one-at-a-time proposition, whilst the industries you claimed were heavily regulated actually consistantly increased productivity, thus wages. Progressive policies that constrain capital, or plunder it, or misallocate it destroy the basis of production and high wages.

Posted by rilfeld | Report as abusive

The author starts from the laughably ridiculous premise that America had more regulation 50 years ago. You could count the pages of the Code of Federal Regulations or review the studies showing the explosion in licensing requirements and credential requirements at the state and local level. You can’t even do nails in many cities now without a license. Apparently he thinks someone back then “enforced wage and hours laws” and they aren’t doing that now. He seems to equate larger union membership with “regulation” even though unions (at least those in the industry) are non-governmental entities.

Since he starts from an invalid premise, it shouldn’t be surprising that he reaches the exact wrong solution by calling for more regulation. He’s like a medieval doctor with a wounded man in front of him who concludes, “we need to bleed him.” Its over-regulation, particularly for single proprieter, small business and start-ups that is killing the economy. The large companies can hire lawyers to sort through the red tape. The small companies just get in trouble and quietly disappear.

Posted by rgriffin50ish | Report as abusive

Government can’t create private industry jobs – only destroy them.

Government can create government jobs but every one of those jobs kills a private industry job.

Once we realize that we can kick government out of the job creating business.

That’s the job of the private sector…..

Posted by MauiSunset | Report as abusive

Post-war prosperity existed briefly because the U.S. accounted for half of the global industrial output. Such conditions will never exist again. Marxist-Leninist proposals like those suggested in this article are a recipe for failure, just take a look at Spain/Greece/Italy or other failed European states. No, working at fast food restaurants will not lead to a six-figure salary, and if it did, eating at McDonald’s would cost as much as a top-level restaurant, thus pricing the poor out of the market. And it’s astounding that anyone would argue for trade restrictions given their proven failure at achieving anything. Just take a look at the Smoot-Hawley tariff that helped accelerate the Great Depression

Posted by blayblayblay | Report as abusive

Sure. All we need do is bomb the hell out of Europe and East Asia and subject everyone else to some colonial empire. Might take a hundred million dead people but that’s a low price to pay for our precious social contract!

Then we can have monopolistic companies and thug-run unions, stay-at-home moms, in the closet gays, in the back of the bus Blacks, and in the fields Hispanics, as God clearly intended!

Those not white males need not apply at all, and the Catholics and Jews will only be tolerated if they don’t try to live on the better streets or join the better clubs.

Maybe we can even find some Mafia-connected, drug using, bimbo-chasing, arrogant and ignorant family like the Kennedys to nearly get everyone on Earth barbequed.

As for me, I like Wal-Mart, Amazon, and Google. Even more, I like being able to go to bed reasonably sure I will not wake up to nuclear war. And even more than that, I rejoice in how in my own lifetime most of the world has become fairly free fairly healthy and fairly prosperous, for the first time in human history.

I kind of like what the United States has done for its peoples, and for our world!

Posted by johnwerneken | Report as abusive

This entire article was written without any attention paid to labor costs and the decisions businesses must make to hire full-time workers at decent salaries based upon the essential comparison entrepreneurs must make of the potential productivity of workers as compared against the cost of employing them.

This author seems to argue that wages are decided by someone other than entrepreneurs and he instead discusses and bemoans the current state of labor unions and government regulators, the latter of whom he ludicrously suggests have reduced influence in our economy today, before moving on to a call for higher taxes.

Chalk this one up to a propaganda piece written for the exclusive purpose of turning the attention of Americans away from the growth in part-time employment in our country due to Obamacare’s employer mandates. It really has no other purpose.

Posted by jjsulzbach | Report as abusive

Seems like America will first have to rebuild the 40 hour work week. Which means repeal Obamacare.

Posted by gliderpilot | Report as abusive

Yeah, that’s it – more socialism.
You’d think after five years of Obama’s “crony socialism” with the result of the most Americans EVER unemployed, in poverty, on food stamps, record bankruptcies,and a doubling of our national debt, Democrats would admit TOTAL failure, but no, they call for more of the same.

Posted by TPAINE3 | Report as abusive

Dear Mr. Kuttner,

The high wage economy which you long for was destroyed by the first mass immigration law of 1965 authored by your hero, Ted Kennedy. This law and it’s many children, most conspicuously the immigration amnesty of 1986, began the process of importing basically unlimited numbers of low skill, uneducated workers. This 50 year immigration policy destroyed the labor movement by guaranteeing a surplus of low wage workers and set the US on a course of ever increasing income inequality. Now the “Gang of 8″ immigration bill seeks to double down on the destruction of the working class by doubling the rate of low skill immigration. If anything like the present bill is enacted, wages for the bottom half of the income distribution will decline by about 8% or so, resulting in a transfer of 300 billion in income from the 99% to the 1%. This immigration bill is the policy equivalent of FDR importing 46 million Tom Joads at the depths of the Great Depression. Apparently, this immigration bill is a joke you libs will never get, as it defeats every other policy goal, especially reduced income inequality, that you espouse. Oh right, I forgot, after you finish destroying the working class through mass immigration, you’ll make it all better by advocating for a higher minimum wage. So sad and pathetic.

Posted by MartinGale | Report as abusive

Tariffs. Bring them back. America was built on a 30% import tariff. In the past 30 years, it has slipped to 1%. That experiment has clearly failed. Other countries (including China) are still charging us 20-30% for entry into their markets. This arrangement of turning America into a country of just-customers rather than producers, benefits ONLY the multi-national companies who aim to sell here.

America has the richest, most advanced market in the world. We should be charging for access to it. This generates direct national revenue (as provided for in the Constitution) and it incentivizes domestic production of goods.

Tariffs. 20%. Re-start today.

Posted by AlkalineState | Report as abusive

[…] the discussion of wages that’s been going on here, you might want to take a look at an op-ed from The American Prospect editor Robert Kuttner at Reuters. In the op-ed Mr. Kuttner argues that, if you want a return of the high wage America of fifty years […]

Posted by Will a Return to Yesterday’s Labor Policies Bring a Return of Yesterday’s Wages? | Report as abusive