Policy options for addressing wage stagnation and inequality
Last week we discussed a disturbing trend in growth: the average hourly wage for an American worker is essentially the same as it was in 1979 after inflation. Meanwhile, the share of that fixed pie has been divided up unevenly, with higher-income households gaining while everyone else lost ground.
The vexing problems of stagnation and income inequality are results of many factors: globalization, technological change, demographics, policy errors, influence peddling; the list goes on. Today, some potential responses.
EXPAND THE EARNED INCOME TAX CREDIT
The EITC has been one of the most successful subsidies in recent memory, lifting 5.8 million Americans out of poverty. The credit provides additional assistance to low and middle-income earners who are already working. Expanding the program would provide additional resources for working families to seek education and training to prepare them for higher-paying jobs. The incremental credit could be made dependent upon entering a job training or higher education program.
INCREASE EDUCATIONAL SUBSIDIES OUTSIDE THE EITC
One consistent theme in analyzing variation in incomes is educational attainment. Americans cannot hope to compete in a global economy without specialized education and vocational training beyond high school. And the public education system should consider expanding partnerships with industry to better tailor the secondary curriculum to address the needs of employers in a global marketplace.
COMMIT TO MAJOR INFRASTRUCTURE INVESTMENT
This has become a cliché, but the United States has neglected maintenance and improvement of the bones that underlie our economy. After 60 years, the Interstate Highway System has generated more than $6 in economic benefit for every dollar spent, while the space program has returned ten bucks per dollar invested. Today our spending on infrastructure is close to a post-war low as a percent of GDP, and that is an important component of wage stagnation. A significant commitment to capital improvements in transportation and broadband networks can be shown to generate some of the highest returns to investment of any government programs.
GET SERIOUS ABOUT IMMIGRATION REFORM
This will cause some people to set their hair on fire, but legalizing undocumented workers and inviting more high-skilled immigrants to our shores will increase consumption, output and wages in the long run. Our economy is growing at a tepid long-term pace in part because the labor force is growing too slowly. GDP cannot expand rapidly if baby boomers retire and Gen X doesn’t have as many kids; this is the simple math of economic growth. A rational immigration policy would reboot labor force growth and ultimately increase the size of the entire pie to be distributed.
INCREASE ECONOMIC DYNAMISM
Almost all net job creation in the United States comes from new companies. Since the late 1970s, business startups per 1,000 population have fallen in half. This decline in dynamism is weighing on wages and increasing inequality. One factor is overregulation. Most of the headline deregulation has benefitted primarily big companies; we must tackle job-killing factors such as excessive occupational permitting and licensing and the abuse of non-compete arrangements. Health care costs are another startup killer; both the flawed Obamacare plan and the mindless repeal thereof without a viable replacement impede small business creation.
These initiatives require resources. A starting point would be to repeal the 2017 tax cuts for the highest earners. Since 1979, after-tax incomes for the top 20 percent have grown nearly four times faster than for the middle
60 percent, while the top one percent has gained eight times faster. This is unconscionable under any circumstances, but in a crisis of inequality it is retrograde.
There are many more options, but a dialogue over these ideas would be a good start.