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Unemployment is low and standard economic theory says that when unemployment drops, wages should rise. However, the latest Department of Labor report shows that even though unemployment has reached historic lows at 3.9%, wages are not rising. Why? We explore the reasons with Prof. Robert Pollin

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SHARMINI PERIES: It’s the Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

Last week, the U.S. Labor Department announced that the unemployment rate dropped to 3.9 percent. This is the lowest unemployment rate since 2001. Some economists predicted that it will continue to drop and reach 3.5 percent by the end of this year. Now, President Trump has been celebrating the news, of course. In a recent tweet, he wrote: “Jobs, jobs, jobs. Unemployment claims have dropped to a 45 year low. Together we are making the economy great again.”.

However, one issue has puzzled many economists, which is why wages are not rising faster than inflation. Economic theory normally stays that when unemployment is low, wages go up, because there is more competition to attract workers. However, both wages and inflation remain quite low at the moment. Now, President Trump himself offered an explanation six years ago to this issue, before he was president, when he was still a businessman. He said: “Unemployment rate only dropped because more people are out of the labor force and have stopped looking for work. Not a real recovery,” he wrote. “Phony numbers.”

So what is happening now? Why are wages stagnant while unemployment is reaching historic lows? Joining me now to explain all of this is Bob Pollin. Bob is a distinguished professor of economics, and he is the co-director of the Political Economy Research Institute at the University of Massachusetts Amherst. He’s the author of many books. Relevant to this discussion is the book “Back to Full Employment.” Good to have you with us, Bob.

ROBERT POLLIN: Great to be on. Thank you, Sharmini.

SHARMINI PERIES: Bob, let’s take up what the economists are saying about what’s happening, the apparent contradiction between low unemployment and the stagnant wages. Now, if we were to take Trump’s own explanation, he says that these numbers are phony, that the economy is not in recovery, people have just stopped looking for work. What do you make of that explanation?

ROBERT POLLIN: Well, it’s always been true that the headline unemployment number that we hear, the one that you just quoted, 3.9 percent at present, does not fully capture the distress people feel in the labor market. That was true when Trump made his comment six years ago. It was true when he was a candidate. He was saying, you know, the actual unemployment rate is maybe closer to 40 percent, not 5 percent.

So here are the issues. The official rate, this 3.9 percent, first of all does not take account of people that are working part time and want to work full time. So if you have a job that’s for five hours a week and you want a 40-hour-a-week job, you are not counted as unemployed. But the Labor Department does have another category that includes people that are underemployed, and people that have dropped out of the labor force temporarily because they don’t see good prospects for themselves. If you go to that number instead of the official number, the official rate by the U.S. Labor Department today is actually 7.8 percent, not 3.9 percent, if we include people that are taking jobs at just a few hours a week, less than a full week, and people that have dropped out because they temporarily feel distress.

Now, on top of that, if you include what Trump was referring to six years ago, which is that people, the total participation of the adult population in the labor force, that has gone down by a lot, relative to right before the great recession a decade ago. If you said that the participation rate should be the same as it was 10 years ago, well, now we’re up to about a 12 percent unemployment rate. So that’s, you know, you can go that from three point nine percent the official rate all the way up to something like 12 percent if you include the low participation rate, the people that we call underemployed, and the people that are discouraged.

SHARMINI PERIES: All right. Now, another explanation, Bob, comes from Paul Krugman, who says that employers are simply more reluctant to raise wages than they used to. Instead, they are relying on one-time signing bonuses to attract them. Now, we are getting away from the actual numbers here, we’re talking about wages. But what do you make of that explanation for wages?

ROBERT POLLIN: Well, first of all, let’s say, just looking, the Wall Street Journal yesterday had an article saying that wages aren’t going up. So this is the Wall Street Journal acknowledging the reality that despite this, at least according to the official statistics, the lowest unemployment rate in decades, we still are not seeing wages going up. Now, of course it’s always the case business owners don’t ever want to give wage increases. So the fact that if Krugman is saying, well, you know, they’re reluctant, well, they’re always reluctant. They want to keep money in their own pockets, not give money to workers. And the thing that drives up wages is, therefore, workers’ bargaining power. That’s the key now, that’s the key always.

And the fact is that what we have observed, not just now, but what we observe at this point for almost 50 years since 1972, the average wage for our nonsupervisory worker today is lower than it was in 1972, 46 years ago. So it’s not just a current phenomenon that Krugman is referring to or something, reflecting the sentiments of business owners, capitalists. What it is is that workers’ bargaining power has been attacked for, you know, two generations now. This is the, this is the heart and soul of neoliberalism. And the, the dynamic of it was explained extremely clearly and straightforwardly by none other than Alan Greenspan, who was the chair of the Federal Reserve for 17 years, the longest-serving chair of the Federal Reserve, in the middle of his tenure back in the late 1990s. The last time unemployment was down this low, official unemployment went below 4 percent, wage inflation wasn’t going up then, either.

And so Greenspan had an explanation. He was very straightforward. He said, it’s traumatized workers. That was his term. The workers are traumatized. What does that mean? He said, well, that workers see that businesses have other options, and they are therefore, the workers are therefore reluctant to push for higher wages, even at low unemployment. They’re reluctant because the business owners will say, oh, you want a wage increase? Oh, fine, well, we’ll relocate to Mexico, or we’ll just start importing from China. And as a result of that, workers’ bargaining power, even at relatively low unemployment rates, has been weak. On top of that the institutional forces supporting workers’ bargaining power, mainly unions, has also been attacked. This is also a cornerstone of neoliberalism.

So what we have is this long-term trajectory of even at low unemployment, workers do not have the bargaining power that they used to have. This has not been fully recognized in mainstream economics even now, even almost 50 years after the phenomenon emerged, in reality.

SHARMINI PERIES: All right, Bob. I should add to that that Bernie Sanders just a few days ago introduced a Senate bill protecting employees’ rights in terms of EFCA, the employee protections to organize in the workplace. And this is a bill that had been outstanding throughout Obama’s period, where he promised to pass it. That never got through. And Bernie Sanders has reintroduced it in an effort to address exactly what you were just talking about.


SHARMINI PERIES: And so let’s move on. What about the relationship, Bob, between productivity and wages? Until the 1970s there was a very direct relationship between the two. However, since then the relationship has broken. In other words, even though productivity is increasing, wages are not, regardless of the unemployment rate. Why is that happening?

ROBERT POLLIN: It’s the same explanation. So what we see is that since 1972, again, wages have basically been stagnant. Average worker productivity, meaning the amount the average worker produces in the course of the day, from an average day, with the average level of machinery behind them, the average worker produces about twice as much as she or he did in 1972.

So if the average wage is stagnant and average productivity has doubled, that means the income is rising to the top. So if you want an explanation for the rise of inequality in this country, that is the first and foremost explanation, just in logical, statistical terms. If you’re producing twice as much, and the workers, the average workers are getting paid exactly the same, then the rest of that increased product is going to people other than the workers. And that’s what explains, more than anything else, income inequality and wealth inequality.

And again, why is, why aren’t wages going up relative to productivity? Well, you know, standard economic theory said yes, wage increases should rise with productivity. In fact, Paul Krugman himself way back, twenty-five years ago said this is, you know, this has been all throughout history, it was always the case that wages rise when productivity rises. Well, it’s just not true. It’s just not true, it hasn’t been true for almost 50 years in this country. And the reason, again, is that the bargaining power of workers has been assaulted by neoliberalism. In fact, if you want to name one thing that defines neoliberalism, this is exactly it, that you run an economy in which the benefits of productivity growth accrue to the rich, and everybody else faces stagnating incomes and opportunities.

SHARMINI PERIES: Now, this is rather counterproductive for the capitalists itself and neoliberals, because less money there is in the hands of workers, the less they will be able to purchase and stimulate the economy. Your comments on that?

ROBERT POLLIN: So the alternative path to stimulating the economy and generating profitability under neoliberalism has been to explode the financial sector. And so what we have seen again, throughout neoliberalism, and in particular over the last couple decades, has been the extraction of profits through finance using the financial system as a way through which we can pull profits out.

Now, it is true, as you just said, Sharmini, that underlying everything, even if you, no matter how fancy you make your financial system, how complex, in the very end, you need people to buy products. You need people to buy products. And the fact is that, you know, the U.S. economy, Western Europe, they’ve, the growth trajectory has been stagnant, again, over roughly the same period. Even, you know, right now we are in the longest recovery in the last hundred years in this economy. But the growth rate of GDP has still been modest, in the range of 2 percent, which is way below the growth trajectory for the 50 years up to the 1980, was really about 3.3 percent. So we’re way down in terms of growth, and the underlying pressures are not there, because we do not have enough wealth being spread out so that people have money to buy things. That’s the nature of the economy that we operate under. This is, yes, this is the essence of neoliberalism.

SHARMINI PERIES: All right, Bob. I thank you so much for joining us today, and I’m sure we’re going to have another opportunity to talk about this when the summer numbers come out. When the students and temporary workers, summer workers join the workforce, I’m sure we will be presented with another positive report where it says that the unemployment numbers have hit a new low. But we’ll save the conversation for then. I thank you so much for joining us.

ROBERT POLLIN: OK. Thank you,.

SHARMINI PERIES: And thank you for joining us here on the Real News Network.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.