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What will it take to see real wage increases?

Updated on January 1, 2012

Here we are in 2011. Unemployment is high. Real wages are down. Way down. According to Bill Bonner and Addison Wiggin, the average man earns less per hour worked now than he did in the Carter years. You add inflation and taxes to that and it is no wonder people have a hard time making ends meet. To fuel our nation's woes even more, we have the highest unemployment rate since the great depression. Things are not looking good. Workers are are wanting, nay, demanding higher wages. The call for more unions and higher taxes on the rich are now in vogue. Many people like the idea of the "stimulus" programs implemented by the government, a la work programs of the last depression. Can it work? Will all of this prevent us from another depression? What really leads to higher real wages?
Bill Bonner and Addison Wiggin address this issue in their book, "The New Empire of Debt, second edition".

Real wage increases require three things: First, the society must save money so that it has the capital to invest. Second, it must invest the savings into profitable businesses. Third, these capital investments must result in increased productivity.
So how are we doing on these three fronts? Again, Bill and Addison explain:

Alas, none of these things happened. Instead, these three critical things began trending in the wrong direction. National savings-including public savings-fell from 7.7 percent in the 1970s to only 3 percent by 1990. Business investment fell from 18.6 percent of GDP in the 1970s to 17.4 in the 1980s. And productivity? In the 25 years after World War II, output per employee had risen at average rate of 2.8 percent a year. During the 1980s, this rate fell to less than 1 percent.
I want to add more to these insights. By the 2000s, the savings rate went into the negative. Obama and the current administration put into play the stimulus package that cost over $700 billion so far, and he has plans for more. Setting aside why this happened (a lot had to do with manipulated interest rates, the federal reserve, and government policies; all of these topics are for other blogs), we have made poor decisions regarding our finances.
So where does that leave us? In trouble, that's where. Before we can even consider increasing wages, we have to increase production. Before we can increase production, we have to increase savings.
Right now our GDP is made up of only 30% production (making more "stuff") and 70% consumption. 70%! How can we do this if we have lower real wages and high unemployment? We can't...unless we go into debt to pay for it. This we have done. Since we went off the gold standard in 1971, we have been living beyond our means (once again, we did this both individually and as a nation). This lavish living caught up to us. We are starting to see it in lower real wages and the loss of employment.
Debt doesn't build wealth. It does not build capital. It ultimately acts as an anchor on any individual, business or nation that wants to increase growth.
As near as I can tell, the policies we need to follow to get us out of this slump are not being done. We are still spending way too much. We are not saving. The United States is looking for a quick fix to solve the problems, when what we really need is to get back to work, even if it means accepting lower wages for now, save, reinvest the savings into capital goods (manufacturing), and work toward the future. If we do what is required, we will head the right direction...but it will take time. It will take years if we start now. Every month or year we put it off, the longer and harder it will be.


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    • CHRIS57 profile image

      CHRIS57 6 years ago from Northern Germany

      Great hub, you are right on target about the economic situation.

      But would you please revise your numbers on production. I think the 30% you mentioned are way off reality. The US economy currently has a productivity of some 10%. 90% of GDP go into service.

      Anyway you address the right topic. To make it more simple: Prosperity and wealth of an economy are only created by production/harvesting/making things. Service only distributes the wealth among participants of the economy. (You can have the benefits of a potato only once: when you eat it, no matter how often you clean, transport, peel, fry or deepfreeze the potato). So you have to increase productivity to have more to distribute, to have a real wage increase.

      To do so, investment is needed for productive means, capital investment for higher levels of mechanisation. The bad news: The US is running a negative balance on capital investment. Things are falling apart faster (depreciation rate) than replacement investments create new assets. Of course a positive balance is needed to get productivity and thus real wage increases. The US is far from that.

      To get there i would say even making more debt is allowed. Borrowing money for capital investment is not bad at all, as it is investment into the future. Again the bad news: The US debt increase is almost entirely used for consumptive means.

      I don´t understand why administrations and economic pundits totally neglect this. But then, i am no economist, may be i am totally off track.