Lost Jobs, Stagnant Wages: a Solution

Despite an improving US economy, millions of American families remain worried and frightened about lost jobs and stagnant compensation. Many employees, perhaps most, have seen little progress in their pay for decades now, and are increasingly disappointed and angry, fearful about the future. As Eduardo Porter recently wrote in the NY Times, “President Obama and Bernie Sanders have speculated that frustration over lost jobs and stagnant wages can explain much of the blue-collar support for Mr. Trump and conservative populists more generally.”

( http://www.nytimes.com/2016/01/06/business/economy/racial-identity-and-its-hostilities-return-to american-politics.html )

Nevertheless, the Democratic response to lost jobs and stagnant wages has been tepid at best. The Obama administration continues to negotiate free trade agreements without employee compensation protections, like the Trans-Pacific Partnership (https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-chapter-chapter-negotiating-4). Advocacy for a higher minimum wage helps the lowest paid workers, but not the middle class employees. And talk about economic inequality misses a point that Republicans seem to grasp: people care intensely about their own earnings, less so about what others get.

Republicans, not Democrats, have focused on lost jobs and stagnant wages. It is time to recognize that that when their candidates promote racial and ethnic antagonism, distrust of government, and fearfulness they are responding to desperation largely engendered by compensation. However irrelevant to that problem their fear mongering and scapegoating is, it may well succeed unless Democrats prioritize the issue and offer better solutions.

To formulate one, let us begin with the fact that lost jobs and stagnant wages are not just a US problem, but also one that apparently plagues most developed nations. Consequently, any likely solution must address causes common to all. One in particular stands out: a continued support for free trade despite the impact of recent technological innovations.

The theory of free trade arose early in the Industrial Revolution, when most nations had heavily protected economies with high trade barriers. The fathers of classical economic theory noted that because trade barriers kept manufacturers from using the best and cheapest raw materials, free trade would reduce manufacturing costs. And by opening international markets it would also stimulate sales. Indeed, free trade does increase business profits. It also reduces consumer prices, and has improved living standards in developing countries. Moreover, until the 1970s, some of the business profits “trickled down” to employees.

Free traders assumed that “trickle down” would continue. But the concept of free trade had emerged at a time when businesses had few employees, effective management at a distance was very difficult, and most free trade agreements were between developed countries whose labor rates were not so different as to make cheap labor a trade item. So free trade drove down the price of raw materials, not of labor.

During the last fifty years, however, speedy broadband communications, fast and efficient shipping, automation, and the inclusion of developing countries in free trade agreements have upended the original conditions. Those changes now allow businesses to buy and use inexpensive foreign labor as well as inexpensive foreign raw materials. As a result, while recent free trade agreements have continued to reduce consumer prices and to increase business profits, they have also cost the US and other high wage nations millions of jobs; the threat of job loss has greatly widened the impact by freezing compensation on millions more.

Republican proposals like banning immigrants and deporting the undocumented may speak to employee fears and the human tendency to scapegoat outsiders, but in addition to violating proud American values they are misleading distractions from the real problem. Nor does the perennial Republican theory of “trickle down” work any longer. All this means that whatever support their rhetoric has attracted from worried employees is rather shallow.

If Democrats would prioritize the wage problem, what policies could they advocate? Unlike Republicans, who rely heavily on the support of business owners and top managers, they could take measures to at least ensure that employees again share in business profits arising from free trade agreements. They could also reduce the attractiveness of using low-wage workers abroad. Such measures need not be so extreme as to eliminate the consumer benefits of free trade or devastate employment in developing nations; indeed, properly measured they could boost wage rates there as well as in the US. Here are some possible approaches:

• Ensure that trade agreements include protections for employee compensation levels.

• Tax business profits attributable to offshore employment.

• Impose a sales tax on firms that underpay their income taxes because of offshore activities, and earmark the proceeds to reducing health insurance costs for employees.

In sum:

1. Republicans but not Democrats have focused on lost jobs and stagnant wages.

2. Since the 1970s, free trade agreements have become a major cause of lost jobs and stagnant wages in many developed economies because new technology has exposed their employees to an international market of low wages.

3. The inadequate polices that Republicans offer give Democrats an important election opportunity if they prioritize the problem of employment compensation and propose clear and plausible solutions.

4. Such solutions are possible within a free trade context by helping employees again share in the profits of free trade, while making offshore employment and tax shelter maneuvering less attractive.