Raymond Donald Pairan Jr.
Times have changed considerably since 1994 with almost everyone being concerned with every aspect of economic survival and having no time for others in there busy equation of life. In 1994 when I wrote about the inequities in our Economic system nothing has occurred that has moved me from my original concern about the general working condition of the masses. More today than in 1994 the general working population receives very little compensation, respect, and opportunity for positive advancement.
Even more disheartening is the fact that those interests that feed the general population with well-proportioned propaganda on what constitutes a good American consider any discourse on this subject un-American. Now the population is divided in many ways into factions to numerous to mention but the overriding macro-factions have the labels of CONSERVATIVE and LIBERAL. Just what is a conservative or liberal and does it mean that these are people who think like machines in a pre-programmed fashion? Are they individuals that place blinders on and look straight ahead not pondering the corners or dark spaces that envelope their path? If we wish to think like the machines that we create than we will be no better than those machines sacrificing our humanity on the cheap.
The fact of the matter is that large business, large politics, and large living by the few in the upper echelon of power currently rule every aspect of American life. Quality is no longer so important speed and efficiency overrules everything else.
Lets all ignore what is happening around us. Nothing has changed because our political and business leaders keep telling us that where in a normal phase of the economy. This phrase has been worn out from usage but it must be true since the economy also affects them as well as those among us in the bottom strata of the socio-economic rungs. Even though it now takes 2 members of a household to survive economically and we notice that factories where we once worked have moved overseas only to leave vacant spaces of crumbling walls and broken windows. Decay is all around its almost as if the capitalist powers are jumping ship within the U.S. in order to salvage their bottom line within this global economy. The only ones left behind are the general masses and the business/political power structure that is either trying to drive the evolution of the masses into servile units of production, or make for a quick exit to new lands to plunder.
When did it all begin? The crumbling buildings, deteriorating inner cities, lack of good paying jobs, homelessness, high healthcare costs, high educational costs, or basically the general decline of a once great economy. The decline can be traced back to October 1979 when Paul Volcker announced that the monetary policy he was going to enact would concentrate upon the elimination of inflation. The precipitous increases in interest rates from 1979-1982, the direct result of his draconian tight money policies precipitated the reduction in consumption spending among the 90% of the population that propels consumption within this economy. Keep in mind that the general population (or what I like to refer to as the masses) of the United States fuels a significant proportion of this worlds economy. Without their consumption spending and hence their continued economic well being the standard of living for everyone including the political/business elite would start to decay as it has been doing for sometime. So the precipitous in the downward spiral of economic well being for the masses can be traced to October 1979.
The actions taken by Paul Volckers tight monetary policy stifled growth and choked many businesses to death (especially in the manufacturing sector) during a time when this sector was beginning to face increased international competition in what was to become the global economy. Reduced levels of consumption spending reduced income and output (Y one and the same) thereby reducing the average consumers MPC (marginal propensity to consume) thus forcing firms to reduce real wages of those employed which in turn reduced overall savings rates in proportion to stagnant or reduced real wages.
In effect (reference the graph below) the expected inflation (precipitated in October 1979 when Paul Volcker announced his intent to eliminate inflation through monetary policy actions) raised the real interest rate for any given nominal rate, which reduced investment. This reduction in investment shifted the IS curve downward resulting in a fall in income/output from Y1 to Y2. The nominal interest rate fell from i1 to i2 while the real interest rate rose from r1 to r2 [N. Gregory Mankiw, 1992]. So basically what all this means is that all of us had to start fighting for a smaller and smaller pie of available income. The fight was on between the masses and the power elite (being the political/business upper echelon) for who could sustain their current standard of living better at the expense of the other members of society. Given their position within society the political/business elite was in a better position to extract from the smaller pies than the masses and so took advantage of their position of power. The problem is that the political/business power elite having won the struggle didnt stop extracting from the small pie once they had maintained their prior standard of living but kept on extracting at the expense of the masses.
In addition to the policies that the Fed employed to raise interest rates in order to lower inflation, tax increases on average Americans and the increase in military spending enacted during the Reagan administration from 1980 on, further choked off investment capital thus raising interest rates even higher. This occurred because investors were forced to compete for a limited savings pool.
The rise in the interest rate also made the U.S. attractive to foreign investors, which had the effect of raising the real exchange rate thus making our manufactured products more expensive than foreign manufactured products. These events that occurred during the Reagan administration; the Feds draconian measures to eliminate inflation by raising the interest rate substantially over a short period of time, the Reagan administrations tax increases on middle income Americans coupled with the largest increase in military spending during peace time resulted in the U.S. being transformed from the largest creditor nation to the largest debtor nation. The staggering and increasing national debt, and all of the above-mentioned events resulted in significantly lowering consumption spending and decimating a once great manufacturing base that is still declining to this day.
By far one of the worst blows delivered to the U.S. economy during this era was the Feds cold turkey approach toward lowering inflation that resulted (along with the other contributing factors) in the worst recession since the Great Depression. This recession added a significant scar to the U.S. economy in the form of a higher natural rate of unemployment (suggested by theories of hysteresis and thus born out in the factual data).
This higher average unemployment rate has hit the least able of our population to cope: the poor.
In the mist of these occurrences the richest 1% of the population have been increasing their proportion of the income pie at the further expense of the 90% of the working masses. The result has been increased levels of poverty and decay of the poor and their environment. The middle class is evaporating into the poor income stratum: the direct result of the 1% of the rich sucking whats left out of a feeble economy into their realm.
The continuing destruction of the manufacturing sector (that has been occurring since 1979) and the emergence of low paying service occupations that are increasingly servicing the privileged upper classes of our society is resulting in income bipolarization.
Occupational Bifurcation of U.S. Labor:
A Low Tier and High Tier Workforce
As a proportion of new jobs created, the service sector saw an increase in employment of 5.8% while the manufacturing sector experienced a drop in employment of 5.9% for the period from 1979-1989 [Mishel and Frankel, page 104, 1991]. The share employed in the service sector relative to the manufacturing sector also increased with former middle class manufacturing employees (predominantly male) obtaining employment (after being laid off in the manufacturing sector) in expanding (low paying) service sector occupations.
While the proportion of U.S. workers employed in the service sector expands, the product differentiation that is characteristic of the manufacturing sector (innovative new products, improved designs, and quality) does not exist in the service sector. It is no longer the products that are the differentiating driving force (as exists in manufacturing) that results in a competitive advantage but the quality of a firm's management professionals. The best skilled managers and professionals are acquired at any cost since their managerial or professional talent could determine the future course of the firm.
In the past a competitive labor environment for conscientious able-bodied workers existed throughout the smoke stack industries that covered the landscape from urban to rural America. This has been replaced by an enhanced competitive environment in service sector industries that results in the hiring of highly educated and skilled workers for managerial and professional positions. The remaining positions are then filled with unskilled modestly educated (high-school or less) workers relegated to menial low impact tasks. The bias toward highly educated and skilled workers is definitely not limited to the service sector but since this sector values its upper tier of employees more highly than the manufacturing sector (which incorporates a variety of skilled and educated workers throughout their organizational structure) the service sector perpetuates more enhanced bifurcation than the new highly competitive manufacturing sector. Also since the sectorial shift is occurring towards the service sector it is only logical that the emphasis of inquiry be directed at this sector.
The unskilled laborer is only one of many vying for the limited positions within the unskilled labor market: they are not in demand by the service sector firms. So in effect, demand for these workers is anemic and the supply of these unskilled modestly educated workers greatly exceeds the numbers that are demanded by firms.
Since the vast majority of base service sector firms (those that dont employ professionals) dont require skilled laborers or machinists in the production of a product (were the products quality is a function of the ability and care that the laborers or machinists take in the production process) managements decision to pay its unskilled lower tier workforce subsistence wages is based on the belief that these particular workers have a minimal impact on the firms success. Therefore the savings obtained from the marginal remuneration of their unskilled lower tier workforce is used to remunerate their managerial and professional higher tier workforce at a substantially higher level than the wages paid their lower tier workforce. The enhanced demand in the managerial and/or professional labor market places the firm under constant pressure to continue paying these skilled workers a wage that remains competitive with other firms. This demand for skilled labor has accelerated with the unrelenting competition that U.S. companies face from an array of firms in the new international markets. Recently this pressure of locating a professional labor pool that can be exploited through paying substantially less than is typical has been eased through the introduction of H1B visa labor immigration.
All of the above mentioned factors have helped lead to the currently expanding occupational bifurcation occurring within the United States (for that matter globally). Ryscavage and Henle concluded in their 1990 study conducted for the Department of Labor that occupational bifurcation is in fact occurring at an alarming rate in the U.S. economy:
It is clear from data that the higher paying white collar occupations recorded greater percentage increases in earnings over this 14-year period [1975-1989] than did the lesser paying blue collar occupations. This differential developed during the 1980-89 period. For the first 5 years following 1975, the lesser paying occupations did better, on the whole, than the higher paying occupations. For the entire period, the highest paying group (professional, specialty, and technical occupations) recorded the greatest increase. The effect of the differential, of course, is to push the upper part of the distribution even higher, while holding back the lower portion the higher the level of pay and responsibility, the greater was the pay increase over the 28-year period [1960-1988].
[Ryscavage and Henle, pg 12-13 Department of Labor 1990].
The increase in the percentage of families that have fallen below the poverty line is more attributed to the loss of good paying (blue collar) manufacturing jobs (predominantly striking male household heads) [Bradbury, 1990].
Manufacturing Shift Towards More Capital-Intensive Operations
The increased competitive atmosphere of the late 1970s into the 1990s has resulted in a shift by manufacturing concerns from labor towards more capital-intensive operations. Prior to the introduction of robotics and improved production techniques (in the typical manufacturing production line) in the mid 1980s; the unionized factory worker was the pre-eminent factor of production in the manufacturing process. With the changes that occurred from 1979 (increased competitive pressures and other events previously described), the manufacturing industry intensified its search for more efficient means of production with the emphasis towards the utilization of a better mix of capital to labor. Those manufacturing firms that were highly labor intensive could not continue to compete in the new global marketplace with other firms that had a competitive advantage through lower labor costs or newer more efficient production facilities. Thus began the slow but certain demise of the burgeoning U.S. middle class (the blue collar workers that were the foundation of the middle income stratum) and the convergence of incomes towards a bifurcated upper tier and lower tier socio-economic split.
In some cases the manufacturing concerns have moved whole production operations overseas in an effort to reduce labor costs with the effect that entire communities dependent upon a primary manufacturing employer are thus decimated, further increasing the rural pockets of poverty.
U.S. Under Capitalization
More technically the U.S. economy is under capitalized and needs to reach the Golden Rule steady state level of capital per worker (as specified by the Solow model) where consumption is maximized. N. Gregory Mankiw suggests that:
The high return to capital [MPK-δ > n + g; where MPK- δ = 0.08 and n + g = 0.03] implies that the capital stock in the U.S. economy is well below the Golden Rule level. This finding suggests that policymakers should want to increase the rate of savings and investment [N. Gregory Mankiw, 1992].
The above area will be dealt with in more detail in further revisions of this thesis draft.
U.S. Declining Savings Rates
Another area of concern is the declining savings rates within the U.S. economy. There are many factors that have lead to a decline in savings rates (some mentioned previously). Some important contributing factors leading to this decline is the increased tax burden that average Americans must bear: an increase from about 38% to 48% in personal income taxes occurring between 1980 to current. This combined with a decline in the growth of real GNP from 1979 1991 averaging 1.94% compared to the previous 12 year period of 1966 1978 where growth in real GNP averaged 2.73% and it is relatively easy to visualize why private savings has declined. If private savings is composed of [Y-T-C(Y-T)], the decline in disposable income has thus resulted in significant declines in the rate of private savings. To partially remedy this problem personal income taxes should be increased to pre-1980s levels on the wealthy and taxes should be reduced proportionally on middle income Americans.
In = interest rate
Ifr = inflation rate
Ms = money supply
Cs = consumption
Sn = net savings in $s
Sr = % savings rate
Since the majority of employees have 'lower tier' occupations any such bifurcation of the U.S. economy results in a decline in the real wages of this group of workers reducing their consumption (if taxes are held constant) further resulting in a decline in their disposable income. With a decline in consumption a corresponding decline will occur in income for all firms. Declining income or losses will necessitate that firms reduce their expenses bringing down costs. With labor costs representing approximately 3/4's of all operating expenses firms reduce employment through layoff's or the closing of unproductive facilities.
As stated previously firms attempt to increase or maintain the compensation of the core element of their 'higher tier' workforce through the partial increase of stabilization of their 'higher tier' labor costs within the amount saved from the elimination of their least productive 'lower tier' workforce. This spiral of reduced consumption is a gradual process that could result in the further deterioration or elimination of the U.S. capital base has firms continually reduce output (through the elimination of both factors of production: capital and labor) in an effort to match supply with a deteriorating demand.
THE FIRST LEVEL UMBRELLA MODEL:
-r(-m) = s(wr) [-MPC[Y(C)]]
↑-r(↓-m) = ↓s(↓wr)[↓-MPC[↓Y(↓C)]]
↓Y = ↓C(↓MPC) + ↓I(-r) + Gn NX Gn = Gs T,
NX = Ex Im
wr = real compensation
MPC = marginal propensity to consume
Gn = government spending net of taxes
Gs = gross government spending
T = taxes
C = consumption
Y = GNP or output
r = real interest rates
m = M1 money supply
s = savings rate
I = investment
Ex = exports
NX = net exports
Im = imports
The Sub-Level Model of the Poverty Level Under The First Level Umbrella Model:
P = f(Os, m, -Wm)
S = f(-Os, -m, Wm)
PV = f(-P, S, X2, X3, X4, -X5, X6, -X7, -X8, S)
m = the number of workers employed in minimum wage jobs.
Os = occupations requiring skills other than those that are basic to all occupations.
PV = the poverty rate reflected in the number of poor families.
P = the number employed in primary sector occupations is inversely related to the poverty rate.
m = manufacturing industries
S = the number employed in secondary sector occupations is directly related to the poverty rate.
X2 = income inequality (measured by the Gini coefficient is directly related to the poverty rate).
X3 = the unemployment rate is directly related to the poverty rate.
X4 = the college/high school wage differential is directly related to the poverty rate.
X5 = the change in real wages is inversely related to the poverty rate.
X6 = long-term interest rates (as measured by 10 year Fed securities is directly related to the poverty rate).
X7 = the national output/income (as measured by GNP or GDP in foregoing analyses) is inversely related to the poverty rate.
X8 = the level of transfer payments to the poor is inversely related to the poverty rate.
Factual Data Supporting Variables
Definition A secondary sector occupation provides a level of compensation that is at or below the prevailing minimum wage and less than the median level of income (when the entire remuneration package is included). This type of occupation also employs more part-time employees than is typical for the average of other occupations and of these part-time employees there is a larger proportion of involuntary part-timers than is the average across occupations. The occupations are predominantly located in the retail trade, services (health, personal, entertainment and recreation, and business), and agricultural industries. Employees in these occupations are disproportionately younger, unskilled, female and or minorities and have a high school diploma (or GED) or less.
Table 4.8 and 3.24 clearly shows that a disproportionate percentage of part-time employment and involuntary part-time employment is concentrated in the two fastest growing industries of our economy: Retail/Wholesale Trade and Personal and Business Services [Mishel and Frankel, pages 104 & 136, 1991]. The two sectors where these industries are located also had the lowest median weekly earnings in 1989 of any other sector. [Mishel and Frankel, page 104, 1991].
According to a recent Department of Labor estimate in 1992 the number of part-time employees in the temporary help services or help supply services industries more than tripled from 1979 to 1992. These workers are disproportionately young, female, and Black and tend to be in relatively low wage occupations. [Commission on the Future of Worker Management Relations DOE, page 21, 1994]. Table 2 clearly shows that in 1983 the four industries with the highest percentage poverty rates were agriculture (26.78), retail trade (12.01), private household (22.45), and entertainment and recreation (10.75) [Williams, page 328, 1991]. There exists a direct correlation between the low wages of about two-thirds of the poor and their involvement in involuntary part-time employment or otherwise unemployment [Gardner and Herz, page 24, 1992]. In a 1987 study conducted by the Department of Labor it was estimated that over half of all employees with earnings at the minimum wage or below were in service jobs, a field that accounted for three-quarters of the workers with wages below $3.35. [Mellor page 37, 1987]. The same study concluded that the majority of workers receiving the minimum wage or less were women or minorities concentrated mostly in sales and service occupations [Mellor page 38, 1987].
Definition Primary sector occupations are mainly concentrated in the manufacturing sector but important primary occupations are also found in the service sector in data processing and computer oriented employment, executive, technical and professional specialties [Commission on the Future of Worker Management DOE page 7, 1994]. Occupations in this sector require a more enhanced level of skills and education than in secondary sector occupations. Among the various occupations in the manufacturing sector, supervisors and managers experienced growth in compensation while non-supervisory workers compensation fell 0.41% per year for the period from 1979-1988 [Mishel and Frankel page 259, 1991]. In fact overall compensation declined or remained stagnant in both the manufacturing and service sectors of the economy but relative to the manufacturing sector the service sector experienced the most extreme drop the result of the education/skill premiums demanded more and more of workers [Commission on the Future of Worker Management Relations page 27, 1994; Bradbury page 34, 1990].
America and Britain saw the biggest widening in wage differentials highest paid 10% of workers earned 5.6 times as much as the lowest paid 10% in 1989 (the latest figure available) up from 4.8% in 1980 [The Economist July 24th 1993]. By 1984 the number of household heads that had low weekly earnings as a proportion of all household heads that were expected to work increased to 26.1 percent from 19.4 percent between the period of 1967 to 1979 [Danziger and Gottschalk, 1986].
There exists a direct relationship between the poverty rate and the unemployment rate as the attached graph 2 portrays. The structural change that characterized the shift (or decline in manufacturing employment) and the subsequent rise in the share of service sector employment results in a higher proportion of continuing long-run unemployment (structural in nature) and the withdrawal from the labor force of an increasing number of workers (displaced workers) who ultimately increase the percentage of Americans falling below the poverty line [Williams page 324, 1991]. In a survey conducted by the Department of Labor in January of 1986 it was found that approximately ½ of all displaced workers (these workers are not even included in the unemployment figures) had lost jobs in the manufacturing industry [Horvath page 4, 1987]. The areas in the manufacturing industry were the most job loss occurred were primary metals, non-electrical machinery, and electrical machinery [Horvath page 4, 1987]. In 1984 a Department of Labor study (similar to the one conducted by Francis Horvath in 1987) concluded that the occupations experiencing the most job loss were operators, laborers, and fabricators that were also the most prevalent occupations within the manufacturing industry [Horvath page 5, 1987].
Between 1979 and 1987 the College/high School wage differential increased by an average of 18.7 percent [Mishel and Frankel page 93, 1991]. During this same period the real wages of college educated workers increased by 8% while the real wages of high school graduates actually declined by 4% [Mishel and Frankel, page 93, 1991].
These trends are indicative of a declining manufacturing base and the shifting of lower to middle class (high school educated workers) from good paying blue collar manufacturing jobs to low tier low paying occupations within the expanding service sector. The steep decline in compensation that these household heads experienced as a result of being forced into low tier service sector occupations could have resulted in a large percentage of them falling below the poverty line with the overall effect being an increase in the percentage of families falling below the poverty line from 1979 to current. The percentage of families falling below the poverty line did in fact increase from 9.2% in 1979 to 10.7% in 1987 [Department of Commerce Bureau of the Census]. Figure 31 clearly shows that since 1979 the real wages of high school educated workers have declined while the real wages of college-educated workers have increased [Mishel and Frankel page 99, 1991].
There exists a more enhanced demand for skilled workers relative to non-skilled workers than at any time in U.S. history and this is clearly reflected in the increasing real wage differential between college and high school educated workers. The more highly skilled of either the college or high school educated workers earned more than the less skilled within each classification [Murphy and Welch page 285, 1992]. Holding the level of educational attainment constant, the more on the job training that a worker brings to a new position the higher the workers overall compensation. But there exists a perverse relationship between the level of on the job training a worker receives and the workers level of educational attainment: the higher the level of educational attainment the more on the job training the worker receives. Therefore there seems to be a correlation between the increase in the college/high school wage differential (over the 1979-87 period) and the increased bias by firms for highly skilled (college educated) workers (since these workers receive a disproportionate share of on the job training) over unskilled or minimally skilled (high school educated) workers [McConnell and Brue page 422, 1992].
From 1980 1989 real wages for all workers fell more than 9% while compensation fell by about 10% [Mishel and Frankel, page 69, 1991]. For production and non-supervisory workers real earnings declined at an average of 0.7% from 1973-1993 which equates to an overall decline of 14% for the 20-year period [Commission On The Future of Worker Management Relations, May 1994]. In 1992 18% of the U.S. full-time working population earned less than $13,091 representing a 50% increase from the 12% that received low earnings in 1979 [Commission On The Future of Worker Management Relations, May 1994]. The Commission further noted that:
The stagnation of real earnings and increased inequality of earnings is bifurcating the U.S. labor market, with an upper tier of high wage skilled workers and an increasing underclass of low paid labor A healthy society cannot long continue along the path the U.S. is moving with rising bifurcation of the labor market [Commission On The Future of Worker Management Relations, pages 19 & 26, May 1994].
Real earnings among our poorer members of society, relative to real earnings of the bottom decile in other industrialized nations are more reflective of a peasantry to noble relationship of divergence in societal economic terms than should correspond to a mature industrialized nation. In 1993 real earnings for U.S. male workers in the bottom decile were only 38% of median earnings while their counterpart in the industrialized countries of Europe were earning 68% of the median earnings [Commission On The Future of Worker Management Relations, May 1994]. While compensation for the less well off of our society was abhorrently low when compared to other industrialized nations the U.S. upper tier workforce (workers in the top decile) received compensation that was 2.14 times the median earnings, with their counterpart in the industrialized countries of Europe earning 1.4 to 1.7 times the median [Commission On The Future of Worker Management Relations, May 1994].
Higher nominal interest rates (such as those experienced from 1979 into the 1980s) are directly related to the increased percentage of Americans that have fallen below the poverty line since this period. This is because unemployment (which is directly related to nominal interest rates) affects a larger percentage of the poor because of their precarious position (relative to skills and education deficits) [Ryscavage and Henle, 1990]. Therefore when economic conditions worsen the working poor and /or low-income earners are the first to feel the effects by being the first to be laid off or terminated.
The wealthy are affected quite differently from the effects of increased nominal interest rates: they benefit from the upward mobility in interest rates. That is because higher income families hold a higher proportion of interest bearing assets in the form of company sponsored non-cash benefits (stock options) or other investments [Ryscavage and Henle, 1990; Bradbury, 1990]. These benefits accruing to the wealthy in the 1980s took the form of higher interest and dividend income [Bradbury, 1990].
Mankiw, Gregory N. 1992. Macroeconomics. New York: Worth Publishers.
Ryscavage, Paul and Peter Henle. 1990. Earnings inequality accelerates in the 1980s. Monthly Labor Review December: 3-16.
Mishel, Lawrence and David M. Frankel. 1991. The State of Working America, 1990-91. Armonk: M.E. Sharpe, Inc.
Presidents Commission on the Future of Worker-Management Relations. 1994. Washington, D.C.: GPO
Gardner, Jennifer M. and Diane E. Herz. 1992. Working and poor in 1990. Monthly Labor Review December: 20-28.
Mellor, E. F. 1987. Workers at the Minimum Wage or Less: Who They Are and the Jobs They Hold. Monthly Labor Review July: 34-38.
- Rich man, poor man. The Economist July 24th: 71.
Danziger, Sheldon and Peter Gottschalk. 1986. Work, poverty, and the working poor: a multifaceted problem. Monthly Labor Review September: 17-21.
Williams, Donald R. 1991. Structural Change and the Aggregate Poverty Rate. Demography vol. 28 no. 2: 323-332.
Horvath, Francis W. 1987. The pulse of economic change: displaced workers of 1981-85. Monthly Labor Review June: 3-13.
Murphy, Kevin M. and Finis Welch. 1993. Lessons from empirical labor economics: 1972-1992. Inequality and Relative Wages. AEA Papers and Proceedings May: 104-110.
McConnell, Campbell R. 1992. Contemporary Labor Economics. 3rd ed. New York: McGraw-Hill, Inc.
Bradbury, Katharine L. 1990. The Changing Fortunes of American Families in the 1980s. New England Economic Review July/August 25-39.
Can't comment on the maths here. Anyone else want to comment? (Darius?) – PhilJones