Thursday, October 4, 2012

Middle-Class Squeeze: Wages are Down, but we Aren't More Competitive
American wages and labor conditions have been continuously deteriorated since the 1980s. Since the start of the 21st century however, this trend has become especially pronounced. Known as the Middle Class Squeeze, this phenomenon has been particularly pronounced in the US, while real wages expanded strongly in European OECD countries such as the UK, France, Italy and Germany, as well as in the BRIC countries since 2000. It has become a major issue in both the 2008 and 2012 presidential elections. In 2008, the House Committee on Government Reforms published a brief study which concluded that median real household income dropped by almost $1,300 while real household expenses increased by nearly $5,000 over the 2000-2008 period.

How it Happens
Essentially, the deterioration of incomes on the US labor market has emerged in two ways:

1: The large-scale loss of high-skilled, high value added mid-wage employment, to be replaced by low skilled, low value-added, and low-wage employment. According to the National Employment Law Project, 
sixty percent of of US job losses experienced during the recession, while comprising only around twenty  percent of the jobs gained during the current recovery period. Low-skilled jobs meanwhile made up only around twenty percent of the jobs lost during the recession  but nearly sixty percent of the jobs recovered thus-far in the recovery.

2: Declining real incomes: The maintenance of median wage and salary levels in the face of increased price levels and cost of living. Healthcare and energy costs have especially increased, as has education. To compound this trap, the new millennium has seen the rise of household debt to try to cover the difference. The debt-to-income ratio reached its highest level in 24 years for middle class households, while Bush-era bankruptcy reform has made the debt trap considerable more difficult to climb out of. In 2010, the Levy Institute published a study showing that both household debt and the US GINI coefficient spiked upwards since 2000.

Why This is Problematic
According to the standard ruling paradigm in labor market economics, low wages are helpful to a country's economic competitiveness. But, this only begs questions such as:

  • How much wage deterioration is enough and when will the US's wage levels become "competitive"? Do wages and labor standards have to sink to those of China? 
  • What will happen to consumer demand as a result of this trend?
  • If wages are supposed to equal the marginal productivity of labor, how can the replacement of mid-wage, high-skilled jobs with low-skilled Mcjobs possibly be a positive development for our labor market?

Setting aside the ominous ethical significance to what is perceived as the US' core traditional values posed by the progressively increasing American wealth gap, there are long term economic side-effects which we have also seen emerge. 

Among these are a weaker, more debt-dependent consumer market, lower growth in productivity levels within the American workforce. All of this will hurt the progress of the American economic recovery, and will undermine long-term economic health. 

What Can Be Done
Unfortunately, the Middle Class Squeeze has no magic overnight solutions. Addressing this issue would take a package of policy solutions. We can start by asking what the rest of the OECD countries have done in order to promote real income growth. We also take measures to counteract the primary immediate causes of the short-term squeeze.

  • More attention needs to be focused on increasing our labor force's productivity level. This means not only improving the educational level, but securing access to mid-career and between job training as well. In policy terms, it means that our school systems must perform better, university education must be cheaper, and employer training has to be incentivized. 
  • Healthcare costs have to be tamed. 
  • Consumer debt markets have to be reformed and Bush-era bankruptcy reforms need to be scrapped. The growing debt-trap is a large component of the middle class squeeze. It also undermines both short and long term consumer confidence and household savings, two key ingredients to healthy, sustainable economic growth. Climbing out of the debt trap has got to be made easier if the American economy will continue to succeed in the long-run. 
  • High-skilled employment clusters have to be constructed and defended. Essentially this means that the long-term survival of clusters such as Detroit and Silicon Valley have got to be treated as issues of national interest.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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