It’s the holiday season and most American households are struggling, many desperately, as the economy continues it’s dismal performance. Yes, unemployment is down to 8.6% from 9% and higher (where it had been stuck since 2008) but that modest “improvement” was mainly due to discouraged workers dropping out of the labor market. The employment and hiring rates remain at historically low levels.

But while there’s been lots of attention paid to unemployment and to the income gains of the top 1%, there has been far too little focus on the need to combat poverty level wages. We are enmeshed in a toxic brew of joblessness, low hours (involuntary part-time employment), and low pay (1/3 of all workers earn below 2/3 of the median wage – see below).

It is said that Charles Dickens intended A Christmas Carol as a “sledgehammer blow on behalf of the poor and unfortunate” (“Father Christmas,” New York Times, December 7, 2011). One of the great lessons of Dickens’ accounts of 19^th century London is that poverty for families with working-age adults is rooted less in joblessness than in low pay. But they’re connected: the threat of job loss undermines the ability of workers to demand decent pay and working conditions.

In the first pages of the A Christmas Carol, Dickens writes:

“The door of Scrooge’s counting-house was open that he might keep his eye upon his clerk, who in a dismal little cell beyond, a sort of tank, was copying letters. Scrooge had a very small fire, but the clerk’s fire was so very much smaller that it looked like one coal. But he couldn’t replenish it, for Scrooge kept the coal-box in his own room…”

And when Scrooge overhears his pathetic clerk mutter Merry Christmas to Scrooge’s nephew, his response is “… my clerk, with fifteen shillings a week, and a wife and family, talking about a merry Christmas. I’ll retire to Bedlam.”

Yes, keeping a veneer of Christmas cheer while maintaining a family on 15 shillings a week in the employ of Ebernezer Scrooge does seem to qualify as a bit insane. But in 1843 London, with no employment protection or minimum wage laws, what was the alternative?

Fast forward to America at Christmas, 2011. No employment protection here either. And a Federal minimum wage that fails to come close to a living wage. It is a holiday season in which “Super Saturday” was a bust for big retailers, who have had to resort to endless promotions and offers of “layaway” plans. And even that’s often insufficient, as Fox News.com (of all sources!) has reported:

The young father stood in line at the Kmart layaway counter, wearing dirty clothes and worn-out boots. With him were three small children.

He asked to pay something on his bill because he knew he wouldn’t be able to afford it all before Christmas. Then a mysterious woman stepped up to the counter.

“She told him, ‘No, I’m paying for it,’” recalled Edna Deppe, assistant manager at the store in Indianapolis. “He just stood there and looked at her and then looked at me and asked if it was a joke. I told him it wasn’t, and that she was going to pay for him. And he just busted out in tears.”

At Kmart stores across the country, Santa seems to be getting some help: anonymous donors are paying off stranger’s layaway accounts, buying the Christmas gifts other families couldn’t afford, especially toys and children’s clothes set aside by impoverished parents.”

Just as Scrooge, in the end, saw the light and delivered a gigantic Christmas turkey to the Cratchit family, we can read about charitable holiday season gestures by some of the 1%.

But there’s another approach that can actually make a difference. It’s called social protection. We can choose to organize work and distribution of resources in a way that doesn’t leave clerks earning 15 shillings a week and grown men sobbing at Kmart counters in front of their children.

The truth is that 21^st century America has inherited the free market fundamentalism and extreme inequality of Dickensian England. A recent research project funded by the Russell Sage Foundation has found that the US is not only the most unequal of the rich countries, but its workers experience the highest rates of low pay and job insecurity (Gautie and Schmitt, Low-Wage Work in the Wealthy World, 2010). The reason is quite simple: the absence of protective labor market institutions.

Unlike nearly all other wealthy countries, hardly any American workers are covered by collectively bargained contracts. The data: France, 95%; Netherlands and Denmark, 82%; Germany, 63%; and the UK, 35%… the U.S. holds down last place, at just 14% (2007; figure 3.1, Gautie and Schmitt).  In other rich countries, nearly all low-skill workers are covered by collective bargaining agreements, which results in wages that are kept closer to the median. Bargaining power and social norms disallow low pay, so there is less need for a statutory minimum wage.

With collective bargaining benefiting only small pockets of workers, does the national minimum wage step into the breach? Hardly. The national minimum wage was fixed at $5.15 from 1997 until 2007, when it rose to $5.85.

That’s the bad news: since there was some inflation over this decade, the real value of the wage (in 2009 dollars) fell from $6.77 in 1998 to $5.48 in 2006.  The good news is that legislators raised the wage in a series of steps to $7.25 in 2009, where it is today (some states have higher minimums). That means the real minimum wage was $6.84 in 2009 – back to almost exactly what it was in 1998. Some progress.

To provide some international perspective, Figure 1 compares the US and French minimum wage (MW) in terms of purchasing power. In the 1960s-70s, the US minimum ranged from $7-$9.00 (in 2005 dollars), far higher than the comparable French wage ($2.25 to $6).

Figure 1:

Purchasing Power of the U.S. and French Minimum Wage, 1960-2010 (in 2005 dollars)

Source: The inflation adjusted real minimum wage values are from OECD.stat and are denominated in US PPP units. 2009 is the latest year for France.

But the decade of the 2000s presents an entirely different picture. The French minimum wage has steadily increased from around $7.50 to almost $9 while the US minimum has fluctuated between just $5 and $6.

A higher minimum wage reduces wage inequality for those with low wages. Figure 2 shows that the US minimum wage was around 50% of the median wage (half of all workers earn less, half more) in the 1960s, but now it’s only about 35%. In sharp contrast, over this period the French MW has risen from 35% to 60%. There could hardly be a more striking example of two countries taking diametrically opposing paths in social protection policy.

Figure 2:

The Ratio of the Minimum Wage to the Median Wage (Kaitz Index) for Full-time Workers, France and the U.S., 1960-2010

And the consequence for those earning low wages? Figure 3 shows that the low wage share of employment (those paid less than 2/3 of the median wage for full-time workers) has been around 30% for decades. The French incidence of low pay has declined from 15% in the mid-1990s to just 10% today. The story for 20-34 year old workers is far worse (that’s for another post). Some will argue that France pays a big price in joblessness, as workers are “priced out of jobs”. As it turns out, that is not the case (also for another post).

Figure 3:

Incidence of Low Wages for U.S. (1979-2010) and French (1993-2009) Workers

But there is some good news! First, as noted above, Congress actually (finally) increased the national minimum wage in 2007-9.

Second, it appears that some 2 million home health aides will (finally) be covered by the minimum wage and overtime protections of the Federal Fair Labor Standards Act (they had been exempted under the “companionship exemption” – as if they were teenage babysitters!). (see Michele Host, Huffington Post, 12/20/11)

And third, the prospects for the proposed NYC Living Wage Bill are looking good. Siding with some local business interests, the Bloomberg administration’s Economic Development Corporation hired an outside consulting firm, Charles River Associates  (CRA) to assess the economic impacts of the proposed bill, and CRA in turn, not surprisingly, selected outside consultants widely known to be hostile to minimum wage and living wage legislation.

But the CRA’s report has been roundly criticized by George Sweeting, the Deputy Director of the New York City Independent Budget Office. (testimony, November 22). And there is other good news: New York City’s Public Advocate, Bill De Blasio, has just come out in favor of the bill.

Scrooge’s personal enlightenment and charitable giving (the turkey) in 1843 London makes for a heartwarming tale. Fox News can also, on occasion, deliver heartwarming tales – of charitable giving that helps struggling families with their layaway plans.

But making a real difference requires meaningful progressive public policies, like the establishment of wage legislation that moves all full-time workers to middle class living standards, as France has done. Recent small steps in this direction offer some reasons to be (guardedly) optimistic on the eve of this holiday season.

The headline on the front page of the Thanksgiving Day The New York Times: “Opening Day for Holiday Shopping Shows Divide.”

The next day – Black Friday – Bloomberg ran a story with the headline “U.S. Workers’ Pay Slide Poses Consumer Risk. ”

It may turn out to have been a “Black Friday” for top end retailers, but it’s a bleak season for low income America and the businesses that cater to it. According to the Times’ story: “Wal-Mart’s profits declined in the third quarter as it kept many prices low so its shoppers could afford them.” Michael T. Duke, Wal-Mart’s chief executive, told analysts that ‘There is a real sense that the economic strain is taking its toll.” Without the fuel of credit that had increasingly been required to power spending by low-income workers, Wal-Mart now has to resort to layaway plans for its shoppers.

As 10 percentage points of national income has been directed away from the bottom 80% to the top 1% since 1979, those paid the lowest wages have seen their buying power erode the most. While the quality and quantity of education force can explain much of the distribution of income within the bottom 99% (together with personal networks, effort and luck), differences in educational attainment have nothing to do with the transition of the American economy to extreme inequality since the 1970s. It is also quite clear that among developed countries, America is exceptional: only the UK comes close to US-style extreme inequality.

The lesson is that extreme inequality is the outcome of political choices that have empowered a tiny minority. It has to do with political choices, the way institutions function, and social norms; it is not a natural market payoff to investments in education. The shift of income to the top .1% (which has driven the growth of the top 1%) reflects the market power of a small number of CEOs and finance, medical and legal professionals.

Here are some metrics that focus on what has happened to the wage/salary earnings of American workers.

Employee compensation in the last quarter (April-September 2011) accounted for the smallest share of national income since 1929 (it was 44%, which compares to 53% as recently as 1970). In contrast, the corporate profit share was the largest since 1929 (10% in 2010, compared to 5% in the 1970s and 1980s). (as reported in The New York Times)

What about the distribution of income, regardless of whether it comes as wages/salaries, profits or interest? The following shows the changes from 1979 to 2007:

• the top 1% of households increased its share of after-tax income from 8% to 17%;
• the middle 60% of all households saw a decline from 50% to 43%;
• the after-tax income share received by bottom 20% fell from 7% to 5% (see my first post).

What happened to average real wages by education group (in 2007 dollars)?

• workers with just a high school degree had a real hourly wages decline by 35 cents, from $15.36 to $15.01;
• workers without a high school degree experienced a collapse of $2.29 per hour wage, from $13.69 to $11.38;
• workers who invested in college but didn’t graduate , wages increased by 56 cents, from $16.42 to $16.94,  a gain of 3%.
• workers with only a college degree gained about $5, from $21.53 to $26.51, a rise of 23%.

It’s important to put into perspective this 23% increase in wages/salaries for those with the highest educational attainment.

First, it is not close to the gain in output noted above (+225%), or the increase in output per capita (+50%), or the increase in the share of national income taken home by the top 1% (+144%), much less the the top .1% (324%) (EPI Briefing Paper #331, figure D).

Second, there was no increase in real pay for the college+ group from 2001 to 2007; by this measure, the Bush “boom” entirely bypassed the most educated.

And third, recent research has shown that about one-fifth of the increase in the college-to-high school wage gap between 1980 and 2000 was accounted for by the higher cost-of-living in the (increasingly income-segregated) communities where those with college degrees live (NBER Working Paper No. 14370).

The fact is that as a group, even those with at least a college degree have shared little in America’s growth during the age of free market fundamentalism. It’s not about education.

What does this mean for the standard of living for most Americans? A new and much improved measure of poverty from the Census Bureau has found that, after accounting for taxes, government benefits, and typical expenses, one in every three Americans (33%)was classified in 2010 as either poor ($11,282 for an individual and $24,343 for a family of four) or near poor (50 percent above the poverty line). Further, the Census Bureau found that 10.3 million people who worked full-time in 2010 fell into the “near-poor” category. 

It turns out that this 33% poverty/near poverty rate for American households is nearly identical to the share of American workers paid a very low wage, as Figure 1 shows. For reference, this figure presents the low-wage share for France (which has nearly eliminated low wages by steadily increased the statutory minimum wage). As I’ll show in another post, France has achieved this over the last decade without increasing the unemployment rate or decreasing the employment rate for young workers.  (The source for this and the statistics on France that follow: a forthcoming paper by Howell, Okatenko and Azizoglu.)

Figure 1:

Low-Wage Shares of Employment for the US and France (low-wage = less than 2/3 of the median full-time wage)

Figure 2 shows that most young American workers with only a high school degree are now paid extremely low wages.  This is most certainly NOT the case in France. Almost half of all young American male workers were paid low wages in 2009, up from just 17% in 1979. In contrast, only about 12% of young French male workers with just a high school degree were paid low wages, down from 20% in 2009.

This figure also shows that the US-French gap in the low wage share for young female workers was gigantic: 65% of American female workers with just a high school degree were low-paid in 2010, which was up from 45% in 1979, compared to just 18 percent for their French counterparts, which was down from 25% in the mid-1990s. The payment of low wages is a political choice.

Figure 2:

Low-Wage Shares of Employment for Young Workers (20-34) with only a High School Degree, the US and France

Finally, it is worth pointing out that it is not just poorly educated American workers who are being paid low wages. Figure 3 shows that the low-wage share of workers with “some college” was 50% in 2010, up from 29% in 1979. For those with college and graduate degrees, in 2010 the figure was 19.5%, up from 13.3% in 1979.

Figure 3:

Low-Wage Shares for Young (20-34) US Workers by Education Group

In sum, it’s no surprise that there is a “divide” among consumers and that low end retailers are in trouble. The problem is the redistribution of income away from most households in an age of drastically reduced credit. The results: 1/3 of American households are poor or near-poor, 1/3 of all workers are paid low wages, the real earnings of those without a college degree have fallen or remained constant since the 1970s, there has been a sharp decline in the labor share and record levels for profits, and extreme inequality (the share of income received by the top 1%) has exploded. These outcomes reflect policy choices made under a regime of free market fundamentalism.

To return to the pre-1979 income distribution, we must fundamentally change the way compensation systems work at the very top of the income distribution, but we also need to substantially raise the wage paid to the bottom third of American workers. There is no economic reason why America must be in a league of its own within the developed world in both extreme inequality and the incidence of low pay.

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