Falling prices have appeal to those with stagnant pay

December 17, 2008|DAVID LAZARUS

Tuesday's interest rate cut by the Federal Reserve was intended, in part, to stave off deflation -- a decline in consumer prices that can result in further job cuts and economic turmoil.

Yet for many people, it probably seems as though prices can't go low enough, and that no matter how much you work, it's impossible to get ahead.

Norwalk resident Ignacio Salas, 35, is a full-time insurance agent and makes about $100,000 a year. But this month, he also became a licensed bail bondsman. Salas is hoping that by working two jobs, he'll pull down enough to finally move from his condo to a house.

"I don't know," he said. "It seems really hard. Harder than it should be."

It is. That's because real wages -- the value of people's paychecks adjusted for inflation -- have stagnated or eroded for most of the last 30 years, except for an interval of modest gains from 1997 to 2003.

Meanwhile, productivity and consumer prices have soared.

"A typical working family had less income in 2007 than it had in 2000," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank in Washington. "The inflation-adjusted wage of most workers is actually no higher than what it was in 1973."

And things may only get worse. The International Labor Organization, a United Nations agency, said in a recent report that the deteriorating global economy will result in lower wages for millions of workers worldwide next year.

It predicted that real wage growth in industrialized countries such as the United States would fall from an average 0.8% this year to minus 0.5% in 2009. U.S. inflation, meanwhile, is projected to run 1% or 2% next year.

"Slow or negative economic growth, combined with highly volatile food and energy prices, will erode the real wages of many workers, particularly the low-wage and poorer households," ILO Director-General Juan Somavia said. "The middle classes will also be seriously affected."

From World War II until the mid-1970s, real wages largely reflected advances in productivity. As the value of what workers produced went up, so did paychecks.

That changed as the clout of labor unions waned and as businesses increasingly sought to boost profits by introducing new technology and transferring jobs to wherever people would do them for less money. Companies and their shareholders got wealthier, while the pay of average workers went nowhere.

According to the U.S. Labor Department, real wages averaged $19.05 an hour in 1978. This year, the average real wage -- again, adjusted for inflation -- is $18.23 an hour. That means workers today are making less than their fathers.

Over the same period, productivity has risen nearly 150%, while consumer prices have more than tripled.

Some folks, like Salas, have responded by working more to push income higher. Others have adopted an if-you-can't-beat-'em-join-'em strategy. By becoming self-employed and utilizing advances in technology, they hope to cash in on gains in productivity for themselves.

Rancho Cucamonga resident Keith Sandusky, 41, is a good example. He used to be an ironworker until it became too hard to pay the bills. "Your wages stay the same while the cost of everything else gets jacked up," he said.

Sandusky now hopes to do better by starting his own website, which for a fee will appraise Southern California properties and apply for a reduction in property taxes if a home is found to be overvalued.

"I have no problem working 20 hours a day," he said. "At least now it'll be all me."

Mishel at the Economic Policy Institute said long-term prosperity would remain elusive as long as pay and productivity remained disconnected.

"There's an expectation that when you produce more goods and services, everyone moves ahead," he said. "But that no longer happens."

It would be nice to think employers who have benefited so enormously from advances in technology would treat workers fairly by once again linking pay to productivity.

But that hasn't been the case for more than three decades, so it's naive to think businesses will do this of their own accord.

President-elect Barack Obama says he supports raising the federal minimum wage to $9.50 from $6.55 an hour by 2011. That's a start. The next step would be to ensure that the minimum wage rises in tandem with the nation's productivity rate and inflation.

Employers and employees alike are feeling the pain of an ugly recession. Why shouldn't they share the wealth when we get through this mess?


David Lazarus' column runs Wednesdays and Sundays. Send your tips or feedback to



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